The mainstream would never publish this kind of analysis because it would be afraid of panicking investors… and hurting their advertisers. The underground doesn’t have these constraints. Because there are no advertisers. Just individual investors who pay to read honest analysis and investment advice.

If a warning goes out to the underground, it doesn’t matter if that warning is extremely bearish. The underground is, by nature, very small. They can short a market and take home the profits without the mainstream even knowing it happened. If they go bullish on a sector, an asset class or a growth stock, the same thing applies. They can get in at a low price because they’re a naturally small group. Try doing that with a tip you see on Cramer’s “Mad Money” or read on CNNMoney. You won’t get very far. In fact, you’re more likely to buy high and sell low. It’s just the way the system works.

James’s macro investment research service, Strategic Investment, costs $99 a year. It’s an inconsequential amount of money when you consider the kind of profit opportunities it brings members. But most people don’t like paying for information. So the small fee is a great way to keep the mainstream away… and makes sure the each of the profit plays it presents stays within a small group.

Having said that, we feel it’s important that Notes readers are apprised of the dangers James has outlined in the upcoming issue of Strategic Investment. The issue hasn’t even gone out to James’s paid-up subscribers yet. So we ask you to please not forward this email to people outside the Notes community. (Under normal circumstances, we’re very happy for you to forward our emails. But we’re sure you understand that it wouldn’t be appropriate given the nature of today’s issue.)

James has spent a long time examining the Chinese stimulus program. And his analysis reveals that it is likely to trigger another heavy leg down in the global economy. In fact, James believes that China is the single biggest threat to your wealth right now.

This flies directly in the face of conventional wisdom, which holds that China is leading a turnaround in the global economy. You see, far from contributing a solution to the global depression, China’s stimulus program is aggravating the underlying problem. That’s because it is proliferating supply in a world plagued by excess capacity and collapsing demand. Put simply, China is stimulating the wrong things. This from James:

Beijing has flushed trillions of yuan into expanding capacity in sectors already suffering from collapsing demand and an overhang of capacity.

To cite one example, which has been highlighted by Chinese officials themselves, Li Yizhong, chief of the Chinese Ministry of Industry and Information Technology, has proclaimed that China will withhold approvals of new steel projects for at least the next three years.

Li told a press conference on August 13 that oversupply has become a serious problem because China’s annual production capacity of 660 million tons exceeds estimated demand by an astonishing 190 million tons.

One of Li’s spokesmen put it this way: “The industry must produce according to market needs and avoid adding to the excess capacity. They should avoid reckless investments. The government must also take action to curtail additional investments by companies that are already in excess.”

The problem is Li’s warning is being ignored by the Chinese regime. And James believes that China is now in danger of entering the same kind of deflationary spiral that left the once-booming Japanese in the doldrums for close to two decades.

What the Chinese are doing today is much like what the Japanese did in the mid-1980s. Fearing a fall-off in the earnings of Japanese business from trade, Japan’s Ministry of Finance directed a torrent of low-interest bank loans into the manufacturing sector that were backed by a “nod and a wink” from the Bank of Japan.

The big banks knew they could lend profitably to manufacturers because the government implicitly guaranteed the loans. The manufacturers took the money at low nominal interest rates. It was, after all, almost free money.

Naturally, Japanese manufacturers found themselves awash in liquidity. And they looked to deploy this cash in asset speculation, rather spending on capital goods or other aspects of the real economy. […]

Flash forward to today, and we find another Asian economic superpower has replaced Japan as the world’s largest trade-surplus country. And it is now making the same mistake that Japan made in the 1980s.

China’s leaders have instructed Chinese banks to lend trillions of yuan (CNY7.4 trillion so far) to Chinese manufacturers. These are mostly old-line state-owned enterprises that are the least productive sector of the Chinese economy. As a result, Chinese M2 money supply has increased by 28.5%. And yuan based lending has soared by 34.4%.

James believes Beijing is unwittingly inflating a gigantic bubble. And that when it bursts, it will trigger an even great crisis than the one Japan experienced during its “lost decade.”  The specific ways to profit from this collapse are available only to members of Strategic Investment. But we can reveal here that James reckons that a collapse of the Chinese bubble economy will benefit investors long on the US dollar.

Here at Notes we think a strategic short of the commodities complex – particularly industrial metals – could prove to be extremely profitable in the short term. (We remain long-term bullish on commodities.) Another way to play the China collapse would be to short the “commodities currencies” – particularly the Aussie and Canadian dollar.

If we’re due another leg down in the global economy, we also highly recommend owning gold, either via gold ETF GLD or by holding physical gold (bullion or coins).

Last time he was down, we went out for a big steak dinner in the Palermo district of Buenos Aires, where our offices are. After dinner, Doug regaled us with stories of his near death experiences in Third World countries. Doug has made fortunes in countries that most people couldn’t pronounce!

Doug is very contrarian, and he “lets the bastards have it” like no one else we know. It used to be that even in front of an audience full of anarcho-capitalists Doug would clear out a few seats.

But times they are a changin’. At this year’s Agora Financial Symposium in Vancouver hardly anyone left their seats during Doug’s speech. Like James Dale Davidson, he believes that it’s almost the endgame for the current financial system.

It seems to me that it’s almost the endgame for this financial system. Since the depression of 1929 to 1946, we’ve had a worldwide economic boom; in its early stages it was quite real, since it was based on the savings that were accumulated during the depression. But over the last generation, starting in the 1980s, we’ve had a phony boom, driven entirely by debt.

The whole world is awash in debt. Individual consumers are head over heels in debt. State and local governments are head over heels in debt and going bankrupt. National governments all over the world are deeply in debt. And businesses that are catering to old patterns of consumption are going to find they have no earnings to service their debt with, and their assets are unsalable at acceptable prices.

One of the problems we’ve got here is that people confuse paper money with real capital. This is an important distinction that’s being overlooked. Capital is actually just another word for “savings” – the excess of production over consumption. I can’t emphasize that enough.

Unfortunately, people are used to thinking of capital as being the same as the dollar bills or other paper money in their wallets – and that can be created out of thin air. But capital can’t be created out of thin air.

So, I’m very concerned that all these governments are going to destroy the world’s monetary system in tandem. I don’t know exactly how it will end up, but it’s going to be really ugly. This is compounded by the fact everybody is looking to the governments to solve these problems. Government is the cause of these problems. And the people it employs are not the best and the brightest (how that ridiculous canard ever got traction astounds me) but the poorest and worst part of humanity. [...]

The talk of green shoots is all PR, because the morons running the government actually believe the economy is based on psychology. In fact, psychology has zero to do with it. If it did, then all the Zimbabwe government would have to do to solve their depression would be to slip everyone a Prozac tablet every day. But maybe we’ve already tried that here, since something like 50 million Americans are already on antidepressants….

There may seem to be green shoots in the same way it seemed that way for a while in 1930. After the stock market went down for six or eight months, it reached a temporary plateau and bounced back up. People thought it was just another recession, that they’d pull through as they did after World War I.

There’s a profit angle to all this. (There always is.) According to Doug, the glut in government borrowing and spending means the trade of decade is likely to be short US Treasury’s and long metals. We think he’s dead on with this call.

I want to go for the low-hanging fruit. What the stock market does and what the economy does are really two different things. Stocks could actually skyrocket because of all the dollars the government is creating. People might want to buy stocks because they actually are equity; they represent real wealth. I suspect that in this depression, the stock market isn’t going to bottom until we’re looking at dividends in the ten percent range across the board, after being cut from present levels, which implies a much lower stock market.

But do I want to make a bet that way?

Not particularly. All that money creation could drive the stock market up in spite of much lower earnings and a bad economic situation.

It seems to me that the sure bet is to be short bonds. Interest rates are going way up. Why? There will be tremendous demand for capital, of which there’s a limited supply. Interest rates are the price of capital. So they’re going up for that reason – and because of the trillions of paper dollars the government is creating, inflation is going to skyrocket. High inflation will itself guarantee high interest rates.

So, the trade of the decade is going to be to short long-term bonds and to go long precious metals (which are the only financial assets that are not also simultaneously someone else’s liability). These are two excellent investment plays, but there are many others. We go into a lot of detail on the best ways to play them in The Casey Report and the International Speculator.

However, just as important is political diversification. The main risk you have is your own government. You have to diversify your assets out of the control of your government. This is even more important than picking the right investment today.

[You can check out Will Bonner's introduction to the symposium here. We couldn't find video of Doug's speech from this year's symposium. But here's his speech from 2007. It’s called "The End of the World as You Know It". Enjoy!]

Most individual investors are obsessed with finding “rock star” stock picks or mega yielding bonds. They completely ignore the balancing act needed for long term wealth generation. Anyone can pick a winning horse once in a while but can they do it every day? Probably not, and that’s why gambling is a loser’s game.

For some reason, mention asset allocation or portfolio management and most investors’ eyes glaze over. It’s as if you’ve just asked them to understand the latest Goldman Sachs program trade.

At its heart, the process is as simple as a simple “Know Thy Self” combined with a little discipline. Every time a financial adviser takes on a client they are required to know that clients needs and capabilities. If you treat yourself like your own client, you will be a much more successful investor.

All you have to do is consider two key factors honestly you will never go wrong. And these two factors are stress and greed.

Everyone has heard the simple idea that the young have more appetite for risk and therefore should have more of their money in equities, etc. But according to Simon – a highly experienced money manager and global finance insider – this grossly oversimplifies things.

Age isn’t the only key factor. Your own capacity for risk is equally important. I’ll give you a simple example. I have a friend who made a large profit on the sale of a property at the top of the bubble.

In her mid 30s, she followed her friends’ advice and invested in stocks. But she had a zero natural tolerance for any financial risk and barely slept a wink for more than six months. So despite meeting the age (and stable income) requirements for high risk, emotionally and mentally it wasn’t for her.

Remember: “Know Thy Self”. If you’re 22 years old and cut out coupons for the grocery store, you probably aren’t a big risk taker. So play it safe. Similarly, if you’re 83 and still enjoy taking a bet on a long odd, then there is nothing stopping you. The key is to balance your portfolio to match your own needs. But only ever risk what you can afford to lose.

It may sound obvious, but a retiree is more likely to need a larger portion of their portfolio to generate a steady income than a young member of the workforce would.

Everyone would like to turn a $100 grubstake into $1 billion. But when you’re deciding on your asset allocations, Simon says it is important to be realistic about your return expectations.

If you’re too greedy or too “hungry” for a high return, you’re likely to take too much risk chasing it and end up with nothing (or worse: end up in debt to a margined trading account).

If you want your portfolio to be a source of safe additional annual income, you should consider a heavier weighting to investment-grade fixed income. If you’re looking for higher returns, consider a heavier weighting of “growth story” equities and high-yield debt positions.

In other words, once you’ve figured out your own personal “stress factor,” find the balance with your “greed factor” and you have your asset allocation strategy.

Simon says the following three asset allocation models should suit most individual investors (depending, of course, on your stress to greed ratios.) Given the current levels of market volatility, he also recommends increasing the cash allocations by 5% to 10% and lowering the equities allocations accordingly.

• Conservative (low stress, low greed): 40% equities, 35% bonds, 25% cash
• Moderate (average stress, average greed): 60% equities, 25% bonds, 15% cash
• Aggressive (high stress, high greed): 80% equities, 15% bonds, 5% cash

Don’t get me wrong. Madoff himself is a despicable person. Over a twenty-year period, he created the world’s biggest Ponzi scheme worth an estimated $65 billion. Hundreds of individuals, retirees, and charities were hurt or destroyed by Madoff’s deception.

He deserved to get the maximum penalty (150 years).

Nevertheless, I look at all the positive side effects of the Madoff scandal. Here are the three most valuable lessons we can learn from the biggest crime on Wall Street in a hundred years.

Investigate before you invest

Millions have now learned a powerful investing lesson. Don’t blindly turn your hard-earned funds over to a money manager just because he promises great returns year in and year out. Be a skeptic about money managers who insist they can beat the market all the time. Make sure the manager has an independent and reliable auditor. Check the monthly statements to make sure there’s no funny business going on.

“Due diligence” finally means something again when it comes to investing.

A corollary is: Manage your own money as much as possible. Use a discount broker and select your own stocks to buy and sell. Get educated by reading books, attending seminars, subscribing to independent newsletters, and asking a lot of questions.

Take responsibility for your actions; don’t blame others for your mistakes.

If you are still uncomfortable managing your own funds, consider investing in publicly traded mutual funds with good track records that you can value daily in the newspaper or online.

Diversify, Diversify, Diversify

I really have little sympathy with individuals or charities that were wiped out by Madoff’s shenanigans. Only the greedy or stupid would invest their entire fortune or foundation’s whole endowment in a single investment.

It’s time to return to fundamentals, specifically, the “prudent man” rule that used to carry some weight on Wall Street and the New York media.

Always diversify so that no single investment can destroy your financial independence.

There is a great deal of virtue in the old proverb, “Don’t put all your eggs in one basket.” From time to time, you hear some guru suggest a modern alternative: ”Put all your eggs in one basket -and watch that basket!”

In most cases, it’s a recipe for disaster.

Sure, most entrepreneurs have made it big by concentrating in one particular business, and when they get rich, the wise ones always diversify their surplus wealth – stocks, bonds, real estate, gold, and collectibles. To invest all their wealth with one money manager or in one brokerage account, that is pure foolishness.

Don’t depend on the government to protect you

Another investing lesson that many seem to blindly ignore is that you’re on your own.

Government lawyers at the Securities and Exchange Commission (SEC) were hopelessly outwitted by Madoff’s firm. Private financial investigator Harry Markopolos warned the SEC three times about Madoff’s fraudulent activities, but Madoff got a clean bill of health from SEC investigators.

Why?

Because the SEC has a penchant to go after the little guys, such as brokers promoting penny stocks, who are usually willing to settle with a small fine, even when they are innocent. SEC agents are judged primarily by “quantitative metrics” – the number of actions it brings and cases it settles.

Last month The New York Times highlighted the incredible story of a small-time California stockbroker who was investigated by the SEC for promoting a small cap stock.

The broker refused to settle because he knew he had acted ethically within the rules, and didn’t want his good name destroyed with a “consent degree.” Even though he was repeatedly exonerated by the courts, he was left a bitter 72-year old man with $1 million in debt defending himself. “They chose me instead of Bernie Madoff,” he said, and it cost him dearly. (See the June 27, New York Times cover story, “Chasing Small Fry, SEC Let Madoff Get Away.”

On a broader more philosophical basis, the existence of the SEC creates a false sense of security, giving the illusion that somehow the public is protected by the government from frauds, deception and scandal. Now we know better.

Investors must live by the rule, “Caveat emptor.” Let the buyer beware.

Source: Three Investing Lessons from Bernie Madoff

Before you ask, we haven’t been smoking something strange here at the Notes office. We’ve been reading Justice Litle’s fascinating essay on trader psychology in today’s Taipan Daily. And we figure contains an important lesson for underground investors.

Justice says a famous experiment by a group of Harvard psychologists reveals big “holes” in human perception, especially when we are concentrating hard on a task. The psychologists asked a group of test subjects to pass a basketball back and forth between players dressed in black and those dressed in white. All they were asked to do was count the number of passes between the two teams.

The psychologists running he experiment then sent out a woman with an umbrella onto the court for about five seconds. Next, the sent out someone dressed in a gorilla suit. The ‘gorilla’ also stayed visible for about five seconds.

Guess what? Thirty-five percent of the test subjects missed the woman with the umbrella. And 56% missed the ‘gorilla.’ As Justice says, “The act of sheer concentration required to tally the movements of the ball, and to keep track of the black and white uniforms, was enough to completely block out the perception of a man in ape suit, standing there, plain as day, for a full five seconds.”

This helps explain why a lot of otherwise smart investors missed market-based ‘gorillas’ such as the tech bubble and housing bubble.

Justice calls it market “tunnel vision.” And if you think about, you’ve probably suffered a bout of this strange disease at some point in your investing career. Equally important, these ‘gorillas’ can help you make money…

The crowd is epically bad at anything having to do with deep analysis or insight. This is because the majority of participants in the market crowd are “flying on automatic pilot to the land of groupthink,” to use an old Doug Casey phrase, and another big chunk are passive and not really possessed with the drive to figure out what’s going on. That leaves only a small handful of market participants to do the real thinking and observing.

And thus, when a gorilla walks into the room, most of the time the crowd won’t notice it. They’ll just keep pushing on in the general direction they were already going, or otherwise ignore the big opportunity – or the big risk – that the gorilla represents. This concept is very powerful because the crowd is not always wrong… but by definition, the crowd is wrong at major market turning points.

And thank the Lord (or, perhaps more appropriately, that bad old fallen angel) for them, because the proliferation of lies, half-truths and obfuscations can offer the skeptical investor some of his finest trading opportunities.

Here’s an example: Back in 1982, 16-year-old Barry Minkow of Reseda, Calif., started a carpet cleaning biz out of his parent’s garage. Now these were optimistic, go-go times… the beginning of the Reagan Revolution that would see the Dow Jones Industrial Average rise from sub-1,000 levels to unthinkably unimaginable heights.

A $100 Million Con Doesn’t Seem Like Much These Days

Pretty early in the game, Minkow decided on one thing for certain: A small-town Cali kid stood next-to-no chance at grabbing a piece of this hot, steaming pie armed with nothing more than the truth and a rented carpet steamer.

He needed more than a mere couple hundred bucks a week. He needed Wall-Street-style capital. And he went after it in ways that any modern Wall Street exec can understand (and even admire): He borrowed. He lied. He stole. He burglarized. He even forged.

But he was charming about it all, and so was lauded as a paragon of virtue by such discerning, well-informed folks as the Los Angeles Times, The Wall Street Journal, and Oprah Winfrey. Eventually, he did what any accomplished scoundrel does: He went public. And by the time the whole house of cards collapsed, Wall Street had showered some $110 million (a great deal of money in those halcyon days) on the 21-year old “Biz-Whiz.”

Back in the Game

F. Scott Fitzgerald has stated categorically, “There are no second acts in American lives.” The charming liar at the center of this tale has, well, “put the lie” to that homily, as it were.

Mr. Minkow has been out of jail for some time now, and is in fact really doing quite well these days. His latest endeavor, The Fraud Discovery Institute, claims to have grossed $1.2 million in 2008. His system depends on that one thing he knows so well: “Everybody lies.”

His firm searches through thousands of executive resumes posted on corporate filings. He cross checks various biographical or educational claims such as “born with a silver spoon in mouth” or “master’s degree from Ivy Walled U.,” and when he finds that these claims come up a tad short of the truth, he shorts the bejeezus out of the company’s stock, and then pitches a very public fit about the fraud.

Careful Now…

Please understand that I am not suggesting that you invest any of your hard-earned money with Barry. As James Ratley of the Association of Certified Fraud Examiners puts it: “As far as being reformed, that’s something only Barry knows.”

However, a quick perusal of various daily newspapers seems to indicate (at least to Barry and me), that Wall Street and Washington have a virtually unending supply of prevaricators, smoke blowers and truth stretchers. And each one offers you an honest way to make some coin off their fibs.

Again, I have an example for you snatched straight out the headlines: Yesterday, all the cheerleaders and talking heads were touting a fabulous “3.4% Increase in Durable Goods!”

Now Wall Street just loves news like that, and rewarded Washington by pushing up shares almost 3%.

“Lies, Damn Lies and Statistics”

“Fabulous” is a great way to put it. While it wasn’t an out-and-out lie, it was another one of Washington’s grand exercises in obscuring facts with statistics.

Let’s start with that grand top line 3.4% gain. I am holding the actual report from Census, and there it is in the very first paragraph, so it must be true, right?

As a freestanding number, yes. But when you skim all the way to the very last paragraph, you arrive at a bit of awful contextualization. Seems that to arrive at a gain that strong, they had to downgrade January’s already dismal performance by another 1.42%, increasing the loss that month to a truly mind-boggling -7.3%.

Now we are still left with a bit of a net rise, just a touch over 1% (provided they don’t “revise it” away next month). And this is indeed a good thing, because we haven’t seen durable goods orders rise in over six months.

Finding the Catch…

And it seems like the more you prowl through the details (much in the same fashion that Barry Minkow sifts through resumes), the more you find the horrid clues as to where we really stand.

For example, Washington has pledged to fund the recovery in part by cutting back defense spending. However, if you exclude the 35% increase in February Defense shipments, that 4.3% gain drops down to a mere 1.7%.

As my wife points out, I am a touch of an antisocial curmudgeon who is never happier than when sorting through long lists of supposed facts looking for red herrings. If you too like this sort of thing, here is the link to the census department’s latest stats: http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf.

And Finding the Profit…

For those of you who actually have lives, I will cut to the chase: Over the next few months, we may very well hammer out a bottom. This may even be the beginning of the end. But it is not yet the new beginning Wall Street is looking for.

The “Grand Turnaround” will require at least one more test of support, forming a classic double bottom. Then we will see confirming signals from various statistical indicative systems, like my own Multiple Moving Average/Money Flow Cross Reference.

I promised you a way to profit off this smoke, and here it is: Buy short-term puts and long-term calls on major market players such as Ford (F:NYSE) and General Electric (GE: NYSE).

The puts will allow you to survive the herd’s inevitable disappointment on each episode of false spring. For example, one such set of puts WaveStrength Options Weekly readers are holding gained some 12% yesterday when their underlying shares dropped 4% as the market began to decipher how it was rooked (again).

Gains like that allow you to tolerate losses in the long-term calls that are your bridge to the revival that is, indeed, lurking out there just over the horizon. Market disappointment will also drop the entry for these calls. This is a good thing, because in the end, they stand to make as much as 300% gains when the genuine revival (finally) arrives.

Source: Everybody Lies

Actually, it’s not fear. It’s pure irrationality, as top-quality stocks have been spanked down to bargain-basement levels, despite no discernable change in their businesses.

But business is still booming in the biotech sector…

Over that time, we’ve seen three huge buyouts occur in the Big Pharma/biotech area…

It started in January, with the news that Pfizer (NYSE: PFE) would shell out $68 billion to buy Wyeth (NYSE: WYE).

And things really got rolling this week, with the news that Merck (NYSE: MRK) will acquire Schering-Plough (NYSE: SGP) for $48 billion and that Roche and Genentech (NYSE: DNA) have finally concluded protracted negotiations that will see Roche buy the biotech superpower for $47 billion.

Total value of done deals: $163 billion. And in a market where access to capital has supposedly dried up.

The question is: Could these Big Pharma mergers signal a shift in sentiment and a bottom for the broader stock market?

If you’re looking for a simple, one-word answer… no.

But if you don’t take your investment advice from such in-depth, hard-hitting features as the “Lightning Round,” I invite you to keep reading…

The Credit Is There… But Only For The Right Deal

There’s no doubt that it’s tough to get credit these days. But as the merger deals above show, capital is clearly available for the right deals.

For example, in order to finance its deal with Genentech, Roche issued nearly $33 billion in notes. In addition, Pfizer received over $22 billion in loan commitments from various banks to complete its transaction. And similarly, J.P. Morgan (NYSE: JPM) slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

Again, this has occurred during one of the most fear and panic-ridden periods in stock market history. And it’s come despite frequent comparisons of the Depression Era. Listen to the media too much and you’d expect to see the world in a grainy, brown hue every time you look out the window.

Don’t get me wrong here: I’m keenly aware that the economy is in bad shape. No one has ever accused me of being a Polyanna. But my point is that it’s not necessarily all doom-and-gloom (as some would like you to believe).

These healthcare/biotech mergers indicate the beginning of a thaw in credit markets and hopefully the start of a healing process for the markets. Notice that I’m not calling it a “bottoming process” because as I said last week, I do believe we’ll see new stock market lows.

But as more deals get done, investor and lender confidence will slowly return to the market. And I do think more acquisitions are imminent – particularly within the biotech sector…

The Biotech Sector – A Wave of Consolidation

The biotech sector is likely in store for a wave of consolidation. While the above-mentioned Big Pharma companies have boosted their pipelines and created massive biopharma companies with their acquisitions, there are still many pharmaceutical companies that desperately need to fill their pipelines.

And that bodes well for biotech – particularly when you consider that the largest biotech company after Genentech is Amgen (Nasdaq: AMGN), which boasts a market cap of $48 billion.

After that, Gilead Sciences (Nasdaq: GILD), which just announced a $1.4 billion takeover of CV Therapeutics (Nasdaq: CVTX), is next at $40 billion. Then the market thins considerably, with only three companies that have market caps over $10 billion and 11 companies with market caps of $1 billion or more.

For example, Merck could buy Biogen (Nasdaq: BIIB) and Genzyme (Nasdaq: GENZ) for less than it cost the firm to buy Schering-Plough.

The point is: Even though the biotech sector has outperformed the S&P 500 during the bear market, many biotech stocks have become cheap.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin (Nasdaq: BMRN), or Xcelerated Profits Report portfolio member Medivation (Nasdaq: MDVN) and many others like them.

Our 2 Favorite Emotional Friends: Fear And Greed

When managements are scared they hunker down and hang on to capital. But when opportunistic executives add to their businesses – even during downturns – that kind of optimism and activity is healthy. They’re essentially expressing their confidence that conditions will improve.

Remember… emotions control the stock market as much as fundamentals. And as we’ve mentioned in previous columns, fear and greed are the two main players. So when investors see this kind of activity, they start to think about their own opportunities, rather than cowering in the corner in the fetal position like so many have for the past few months.

Big Pharma Falls For Attractive Biotech

As we’ve seen recently, Big Pharma has already fallen for some of the most attractive biotech names. And as some more choice companies begin to get snapped up, you might see a rush into the sector by other Big Pharma firms to grab the existing quality companies before someone else does.

Mix in this momentum with some speculation and that could kick prices higher, causing Big Pharma executives to pull the trigger before valuations get too expensive.

The economy is still bleeding, but these recent acquisitions indicate that the patient is no longer spurting blood all over the emergency room floor. Eventually, it will stabilize and walk on its own again.

When it does, the strongest drug companies will be the ones that took advantage of this unique opportunity to fill their pipelines with products from inexpensive biotech companies.

Source: The Biotech Sector: Big Mergers Could Mean Big Gains For Biotechnology

I thought that was interesting. Not only did he have the beginning and upcoming years in mind but he also had an “exit strategy” in place as well too.

Well, as with a business, you need to have an exit strategy for every Forex trade too. Many trading systems out there mainly put the emphasis on the entry. (”You need to get in on this trade now!”) But it’s rare that a Forex site describes the exit strategy built into their trading system. But that’s a crucial element of your trade.

Let me explain why with an example.

The other day I saw the Forex account of one trader who started with US$10,000 as his initial balance. In just 30 days, he managed to turn that US$10,000 seed money into US$70,000…and then unfortunately, lost all his gains and closed out the month with US$5,000 (HALF his initial balance).

Can you believe it? He was up sevenfold on his money…and then lost 50% of his initial balance by the end of the month!

He obviously had a great initial strategy with profitable entry points, but he didn’t have an exit strategy to lock in those gains. This is actually pretty easy to do, if you’re not ready with an entry and exit strategy for each trade.
I want you to hang onto your profits when you earn them, so let’s talk strategy…

You Have to Play Both Offense and Defense!

For starters you really need two exit strategies.

You need one offensive and one defensive. Just like a good football team has to be able to play both sides of the game…well, you need to play both sides as a Forex trader.

You better not only know how to make profits (offensive) but also how to protect those profits (defensive).

So let’s talk about the defensive strategy first because it’s really the most important.

A defensive exit strategy is your stop. You place a stop-loss at the point where the market will prove you wrong in your trade. You can also place a stop-loss where you have risked the maximum amount of your account that you are willing to lose on that particular trade.

So one way to do this is to identify areas on the currency chart that show signs of support. Place a stop below that area. That way, if support is broken and a new downtrend emerges, you don’t ride it all the way down and give up your account balance in the process.

Your Stop-Loss Goes Under the Support Line!

However, another approach is not only to analyze this aspect but also to analyze the potential damage to the account percentage too.

So before you place the trade, look at your entry and your stop-loss price. How many pips is the difference between your entry and stop? (You can find this out by looking at any chart.) Once you know the difference in pips, multiply that number by the number of lots that you are considering investing in. How much does that equal in dollars? Ask yourself: Are you willing to risk that much?

If it’s over 1-5% of your account balance, I’d suggest investing in fewer lots.

That’s my best defensive strategy. Check tomorrow’s A-Letter to hear about playing offense.

Source: Why You Need an Exit Strategy for Every Trade

This from Jason:

“I’ve been buying American stocks,” Buffett said in an editorial in The New York Times. “This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds… If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.”

As the world’s richest man, Buffett offers a kind of comfort that few others can.  And it couldn’t come at a better time. The fourth quarter of 2008 was the worst quarter for the Standard & Poor’s 500 Index in more than two decades, as the closely watched stock-market benchmark tumbled 23%.

It’s likely that even Buffett took the same bath as the average investor.

In separate filings with the U.S. Securities and Exchange Commission (SEC), Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK B) said it spent $9.45 billion on equity securities in the first nine months of last year, Bloomberg News reported. Among the purchases:

• Berkshire bought a majority stake in U.S. Bancorp (USB) over a period of time that never saw the bank’s share price drop below 29.09, according to Bloomberg News. That stock is currently trading at less than $15 a share.

• Berkshire increased its Ingersoll-Rand Co. (IR) stake six-fold last year when the shares never fell below $36.54. That company’s stock has lost about half its value since Buffett made those purchases.

• And Berkshire stocked up on shares of Eaton Corp. (ETN) between July and September  – a stretch in which the stock never fell below $52.32.  Eaton closed yesterday (Wednesday) at $44.36 a share.

With such ill-timed purchases, some analysts are beginning to think that “Warren” has lost his touch.

“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”

But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett.  “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.

In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

What Warren’s Buying

In addition to taking healthy stakes in U.S. Bancorp, Ingersoll-Rand, and Eaton, Buffett also committed $4.7 billion to Constellation Energy Group Inc. (CEG), $5 billion to Goldman Sachs Group Inc. (GS), and $3 billion to General Electric Co. (GE) last fall.

Buffett has also spent the past few years stocking up on railroad stocks, especially Burlington Northern Santa Fe Corp. (BNI). Berkshire’s most recent purchase of 2.6 million shares took its stake to more than 76 million shares – in excess of 20% – of the nation’s second-largest railroad.

And last week, Berkshire threw in a few surprises.

After buying 3% of Swiss Re (OTC: SWCEY) in January 2008, Berkshire last week poured another $2.6 billion into the world’s second-largest reinsurance company. Swiss Re has lost about three-quarters of its market value since Buffett’s original investment – further evidence that the investing icon remains undaunted by his losses.

Berkshire agreed to buy $300 million of corporate debt issued by motorcycle icon Harley Davidson Inc. (HOG). The senior unsecured notes purchased by Berkshire offer a 15% annual interest payment, making it one of Buffett’s many recent fixed-income investments.

Buffett agreed to buy $300 million of debt from USG Corp. (USG) in November, and his preferred shares of Goldman Sachs offer a 10% yield. The $2.6 billion he put into Swiss Re was accompanied by a 12% yield.

“He’s got cash coming in faster than most people would have a ready place to put it,” Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares, told Bloomberg. “This economy is certainly providing him with opportunities.”

With about $30 billion in cash on hand at Berkshire Hathaway, analysts are wondering where Warren’s going to strike next.

There is some speculation that if Berkshire shares continue to slide, Buffett could order a share buyback.

In the past, Buffett has said a company must meet two conditions to warrant buybacks of its stock: “First the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling below its intrinsic value, conservatively calculated,” he said.

Shares of Berkshire are down 37% in the past year and there’s little doubt that Buffett has the money.

Of course, Buffett also said last month in an interview with PBS that he would notify shareholders of his intentions before engaging in a buyback program.

“If I ever name a number, I’ll name it publicly,” Buffett said. “I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.”

The last time Buffett made such an announcement was nine years ago.

Another possibility is that Berkshire will invest in energy companies with large holdings in oil sands – notably Calgary-based Nexen Inc. (NXY).

Buffett, along with Microsoft Corp. (MSFT) mogul Bill Gates visited the Athabasca Oil Sands region in northeastern Alberta last August.

“The world will be using more oil 15 or 20 years from now,” Buffett told the Financial Post in an interview. “We are on a course that cannot be changed. It would surprise me if the world doesn’t want to use 100 million barrels a day in 15 or 20 years.”

“You need some … elephant fields [of oil to meet looming demand] and we haven’t found any elephant fields in the last 15 or 20 years,” he added. “So the sands are huge.”

However, some analysts remain skeptical.

“Seems there is a rumor that Berkshire is interested in Nexen – no one can give me comfort that this is indeed the case – they haven’t bought into [exploration and production] names before … but stranger things have happened,” investment bank Scotia Capital wrote in a note to clients.

What Buffett will do next remains unclear, but there is one certainty: He won’t be sitting on the sidelines and hoarding cash.

“Today, people who hold cash equivalents feel comfortable. They shouldn’t,” Buffett wrote back in October. “They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value,” Buffett said in October.

“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: ‘I skate to where the puck is going to be, not to where it has been’.”

Source: Buffett Bargain Hunting Despite 2008 Losses

Thus, always nervous and paranoid, it is not surprising that I see inflation in prices everywhere I look, which is not surprising since I also see inflation in money supplies everywhere I look, which causes inflation in prices, and so I was surprised when the Labor Department said that consumer prices fell 0.7% in December – falling for the third straight month! – and prices were up only 0.1% for the year, which is “the smallest increase since 1954”!

In fact, this is not exactly true, as at bls.gov we learn that, as we already know, “The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in December, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The December level of 210.228 (1982-84=100) was 0.1 percent higher than in December 2007.”

However, when you look closer, you will see that the price of energy going down accounted for most of the lack of inflation, or, if you don’t want to look closer, you can just read where the Labor Department itself said, “Declining energy prices, particularly for gasoline, again drove most of the decline.”

To prove it, they go on “The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index.” 90 percent! Almost all!

In fact, excluding food and energy, overall prices increased 1.8% “for all of 2008”, which is almost 2%, and as such is VERY worrisome when inflation should be zero.

There was bad news for those of us that eat food, however, as the food index rose 5.9% in 2008, as compared to 4.9% in 2007, “with grocery store food prices rising 6.6 percent in 2008 compared to 5.6 percent in 2007.” Yikes!

“In both cases,” the Department reports, “the 2008 increases were the largest since 1980” which is certainly NOT consistent with the headline news that prices were up 0.1% for the year, and reports of no inflation are a Hell Of A Long, Long Way (HOALLW) from the real news that “Among the grocery store food groups, the 2008 increases ranged from a low of 2.7 percent for dairy and related products to a high of 11.7 percent for cereals and bakery products.” A low of almost 3% increase in prices to almost 12% higher prices!

And if that is not bad enough, the index for medical care, which is a huge part of GDP, was up 2.6% over the past year, too! Inflation is everywhere!

And if inflation is actually so low, then why did NYTimes.com have the headline “Cost of Borrowing Zooms Up for Corporations”, which is apparently understating it, as “Even companies with strong credit ratings are paying about 5 percentage points more than the federal government to borrow money, according to Standard & Poor’s. That is more than double the premium they paid last January. Companies with so-called junk credit ratings are paying a 15 percent premium.”

This is, according to Diane Vazza at Standard & Poor’s, “an extraordinary spread” that is “unprecedented in the speculative-grade market.”

So don’t look to me for answers as to what any of this means or how to take advantage of “unprecedented” spreads, as I am far, far too stupid to make any sense of it, if, indeed, there is any sense to be made from it, and that is why I mindlessly, almost mechanically, buy gold, silver and oil, and why I suggest that you do, too, and spend your time productively engaged in downloading porn from the internet and making yourself a drink every time your glass is empty!

Which, now that I think about it, sounds like a very good idea right about now!

Source: Bad News For Those Who Like Food