In today’s column, I’m going to show you how to squeeze cash from the stock market – without really having any to begin with.

Yes, you read that right – money from next-to-nothing.

But before you embark on this “free money” strategy, you have to have an implicit understanding of what you are doing, because there are no free lunches on Wall Street for those who don’t do their homework.

But for those who do, this is the freest lunch you’ll find…

A Moneymaking Strategy For All Markets

Let’s say you have an ordinary stock portfolio. Even if it’s full of stocks that aren’t doing much, it still has value. You might not think so as you watch it stagnate, but it does.

You just have to harness the right strategy that will allow you to take advantage of the current market conditions. But in fact, this strategy actually works well in all market conditions.

It’s called put-selling.

• Basically, you sell a put option on a stock to a buyer at a level well below the current price.
• And when you do, that buyer pays you money into your account immediately – yours to keep, no matter what, and spend however you wish.
• Be careful, however. In return for accepting that money, you’re obligated to buy the stock at the designated put option strike price if shares hit that level at options expiration.

An 8-Step Put-Sell Trade Example On General Electric

Let me give you a put-selling trade example, so I can walk you through the 8-step process and terminology… Let’s assume you like General Electric (NYSE: GE).

1. With the stock currently trading around $13, you’re interested in selling puts on the shares at a level that you think GE would be an attractive buy. Let’s say that level is $7.50.
2. Your next step is to check out the company’s options chain (a listing of all the available put and call options on the stock, with symbols and prices).
3. For the sake of this example, you see put options with a $7.50 strike price, which expire in July. They’re trading for $0.40 on the bid price (the price at which a buyer is willing to buy) and $0.50 on the ask price (the price at which a seller is willing to sell).
4. Your entry price – be it $0.40 or $0.50 – must be multiplied by 100 to give you the actual price or cost because each options contract consists of 100 shares of the underlying stock.
5. So you decide to sell 10 GE July $7.50 put option contracts (that’s equivalent to 1,000 shares). By doing this, you’re saying that if GE closes at $7.50 or below by expiration in July, you’ll buy the shares at $7.50.
6. And for taking this risk, you’ll be paid $400. That’s because when you sell 10 contracts at $0.40, you’re getting 40 cents per share, multiplied by 10 contracts. That’s $400. This money is yours to keep, regardless of what the shares do.
7. If GE hasn’t fallen to $7.50 or below by expiration in July, your obligation ceases.
8. And at any time before that you can reverse the trade by buying back your puts. You’ll be able to do this for less in two cases.

• The first case is if the shares trade at the current levels and expiration is approaching, as the time value of the premium decreases as expiration approaches (this is commonly known as time decay).
• The second case is if GE moves higher, which means the options price will also decrease, as the risk is diminishing. That means the probability of GE shares moving to $7.50 is also decreasing.

The Free Money Strategy – 3 Keys To Selling Puts

At the end of the day, when you sell puts you follow a set of rules that will ultimately allow you to get money for nothing. And there are three keys to doing it right…

• Choose companies that are not in danger of going bust. The higher the risk, the higher the premium – and the higher the chance that you’ll be forced to buy the shares.
• Only choose companies and strike prices that would give you the best bargain in the world if the shares get put to you. There are a lot of companies out there that are extremely attractive at the right price.
• If a position moves in your favor, close it out early. This is all about making money and reducing risk.

For more information on put selling, my colleague Lee Lowell, a former NYMEX trader and bestselling author makes put-selling recommendations exclusively for readers of his Instant Money Trader service. And since its inception last November, he’s cruising along with an unblemished track record: No losses and a string of winners.

Here’s what H.S., one of Lee’s readers had to say about a recent trade: “I just joined Lee Lowell’s service last week and have already collected $1,800. I can only imagine how great 2009 is going to be!”

Feel free to take a no risk, no obligation look at the Instant Money Trader here.

Source: The “Free Money” Strategy: Cash Is King When Selling Put Options

But in this market, as in all markets, it’s best to look at the unfashionable – sectors that are scorned or ignored by the market and countries whose stock markets have been beaten down by adversity. Of course, it’s difficult to do this if you constantly have an ear to Wall Street.  Perhaps that’s why Warren Buffett’s bases his investment business in Omaha, Neb., not New York.

Fashionable investments can do very well in the short term. In 1998-99, you could have made a lot of money in tech stocks. In 2006-07, you could have made lots of money investing in China. If you were given perfect foresight, you could construct a successful investment philosophy around “momentum” sectors, buying whatever is currently “hot” and dumping it before the market turned. For most of us, there’s nothing more boring than an investment that just sits there.

The problem is that none of us have perfect foresight, and what’s worse is that we all have a tendency to believe what limited foresight we do have is better than it really is.

But if investing in fashionable sectors is pretty well guaranteed to give you worse returns than the market, then there must be some other strategy that will give you better returns, on average. After all, for every loser there must be a winner.

And while some of those winners are Wall Street insiders trading on privileged information – the Securities and Exchange Commission can’t catch them all – there is also reason to suppose that a winning investment strategy is to invest in sectors and countries that are actively unfashionable, in which the conventional Wall Street wisdom is to shun them, even on a “bottom-fishing” basis.

One example of this appeared in the banking sector a few weeks ago when Citigroup Inc. (C) shares sold for less than a dollar.

During 2008, there had been innumerable attempts to rally the banking sector’s stock prices, mostly led by the same types of Wall Street operators who had caused the banks’ initial problem. But by February/March 2009, the hot money had stopped trying – either through bankruptcy or exhaustion – and Citigroup’s decline to $1, after several months languishing around the $4 to $5 level, was a pretty good sign that the pros had given up.

At that point, there were two possible routes for the unfashionable investor to take: Invest directly in the stocks that had been beaten down by buying Citigroup or Bank of America Corp. (BAC); or go in the opposite direction, staying with the unfashionable banking sector but looking for the banks that were best run and had the fewest operating or asset problems.

The first strategy, if blessed with pinpoint timing, would have made the most money in the short run, no question. A buyer of Citigroup at $1 would today be sitting on a 300% profit in about six weeks.

However, that was a risky strategy. Citigroup could have been subjected to a government intervention that wiped out its shareholders. Further it was in no sense “value investing.”  Even the bankrupt American International Group Inc. (AIG) has risen five-fold from its nadir to $1.70, in spite of the fact that the government owns 80%, and would be due to receive no less than $150 billion before AIG shareholders got a penny in the case of a liquidation.

Indeed, investing in either would have been like gambling at a Las Vegas casino – fun when it works, but not if you might need the money.

But at the other end of the spectrum investment in banks such as U.S. Bancorp (USB) or BB&T Corp. (BBT) made a lot of sense. I said as much in my late February review of the top 12 U.S. banks.

Those banks had made money even in the dire fourth quarter of 2008, and looked likely to continue making money going forward. They have powerful franchises in attractive regions of the country, and with short-term rates now much lower than medium term rates their new businesses should be exceptionally profitable. USB has risen 110% from its early March nadir and BBT is up 80%. And both were, and are, investments into which you could reasonably put a decent chunk of money.

Going forward, the banking sector is no longer unfashionable; analysts are waiting eagerly for first quarter figures and the results of the government “stress test” so they can pick winners. It is, however, more than possible that at some point in the future the current recession will once again cast a cloud over the banking sector, making it possible to invest while it is again unfashionable. If not, some other sector will be in the doghouse, and we at Money Morning will try and alert you to that event.

Another example, this time an international one.

In 1999, I was working as a banker in Croatia. The North Atlantic Treaty Organization (NATO) was engaged in its Kosovo campaign, dropping bombs on neighboring Serbia and Montenegro (with the occasional stray hitting Croatia, Bulgaria and Macedonia). Needless to say, the tiny Croatian stock market was itself “bombed out” and people were saying that the country was economically doomed.

That was obvious nonsense. Croatia has an exquisite coast and 5,000 islands, and when the neighborhood is free from explosions they attract tourists from all over Europe and beyond. So, I put my modest savings into Croatian shares – the least risky I could find; a medium-sized bank and a food company. Within a year, I had tripled my money.

Opportunities for unfashionable investment occur fairly rarely, but are more common in bleak economic environments like the present. When they occur, they can prove exceptionally rewarding.

Source: How to Bank Real Profits by Bucking Wall Street’s Latest Fashion Trends

This from Taipan Daily:

Wayne Gretzky is widely regarded as the greatest ice hockey player of all time.

At first glance this is an odd thing. When you think of hockey players, you normally picture big, burly, broken-nosed guys with hulking frames and lighting-fast reflexes. (Or at least that’s what I picture. But then I’m not Canadian, eh.)

Gretzky, in contrast, was never all that big. At six feet and 185 pounds, he comes up an inch shorter than your humble editor (who also happens to weigh 185).

That’s not a lot of bulk to throw around the ice. So maybe he was super-fast to make up for it? Nope. Gretzky was never all that fast either.

And yet, this average-built Joe was so far ahead of his peers on the ice, they nicknamed him “The Great One” – and not in sarcasm either. Gretzky earned that nickname.

When he retired in 1999, Gretzky held forty regular season records, fifteen playoff records, and half a dozen All-Star records. He also enjoyed the distinction of being the only NHL player to score more than 200 points in a season. And as if one 200-point season weren’t enough, he did it four times.

Gretzky’s Secret

So what was Gretzky’s secret? How did he do it?

It was brains, not brawn. In trying to explain it, observers talk about The Great One’s “puck intelligence” and ability to “read the game.”

Gretzky was so skilled at processing the real-time subtleties of the rink, in other words, that this one area of dominance enabled him to leave all his stronger, faster opponents in the dust.

When asked to explain his edge, Gretzky put it like this: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

Which brings us round to today’s topic. Great traders do the same thing in markets that Gretzky did in the hockey rink. They anticipate where the puck (or rather the market) is going to be.

Pockets of Clarity

A lot of people think trying to predict the markets is a mug’s game. They think it’s pretty much impossible to know what’s going to happen next month or next year or what have you.

And you know what? For the most part, I agree with them. When someone tells me they know exactly what’s going to happen way down the road because of chart pattern ABC or market cycle XYZ, I usually just smile.

Nobody knows for certain what’s going to happen. There are just way too many variables, many of them self-reflexive and changing in real time.

Humans aren’t smart enough to predict the turbulence in a glass of water, let alone the ebb and flow of global financial markets.

But this doesn’t mean prediction is impossible 100% of the time. It only makes it impossible, say, 90-95% of the time.

That last 5 to 10% makes a huge, huge difference! (Sort of like saying the market is “totally efficient” versus “mostly efficient.” There is a grand-canyon-sized gap between the two.)

Think of the markets as shrouded in fog (the fog of war, perhaps). Most of the time things are hazy. You’re watching, testing, getting a bead on things… then every once in a while the fog opens up. For just a brief window of time, in regards to a specific scenario or a specific opportunity, you see what is bound to happen. Everything clicks into place, and you know exactly what to do.

I call these little moments “pockets of clarity.” Most of the time, you just watch and wait and observe. But when you get one of these pockets of clarity, that’s when action is called for.

The same principle works in a hockey rink, or on a basketball court. (If you’re an NBA fan, just imagine Larry Bird, whose limitations and gifts were a lot like Gretzky’s.)

When a player like Gretzky is on the ice, he doesn’t always know where the puck is going to be, any more than a great trader always knows what the market is going to do. That would be impossible.

Instead, a Gretzky-caliber player spends most of his time hustling, observing, positioning… so that when that clarity pocket opens up – when that brief window of opportunity reveals itself – that’s when swift action is taken.

Sell Every Stock You Own and Buy This Asset Today!

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%… without touching a single stock! Read on now to get in on their next triple-digit winner…

Hustle Required

Here is another Gretzky quote that translates perfectly to the trading world: “The highest compliment that you can pay me is to say that I work hard every day, that I never dog it.”

It’s hard work figuring out where the puck is going to be. It takes countless hours of thought and dedication and practice. It takes real commitment, day in and day out.

In practice, this means different things for different traders. But the common element is that all great traders hustle.

Some (like me) spend a lot of time developing big picture market scenarios… getting a feel for how the major elements could play out… adjusting the top-down view for real-time events. Others (like my friend Zach, aka Cash McDash) take a more bottom-up approach, digging deep into the stories and profiles of individual companies and industries. But the basic process, the hustle, is the same.

And by the way, sharp long-term investors do this too.

A good value investor still hustles and anticipates the puck – just typically more from a balance-sheet perspective, and without worrying so much (or worrying at all) about timing.

If you find an undervalued company with a lot of good things going for it – strong balance sheet, smart management, loads of cash in the bank, quality assets on the books and so on – you can reasonably expect that, with enough patience, something good will happen to the share price at some point in the future.

The key thing, again, is working hard and thinking about where the puck is going to be – specific ways in which the future is likely to shift relative to the present moment.

What most investors and traders do — buying something because the PE ratio looks okay, hopping on a stock because some talking head on CNBC recommended it – is nowhere near the same thing.

Taking Shots

Gretzky said something else that is especially useful for traders: “You miss 100% of the shots you don’t take.”

In practice, this means you don’t have to be right every time. As long as you have good risk management principles in place, it’s okay to be wrong. In fact, great traders often expect to be wrong a fair percentage of the time.

To understand why, let’s go back to the hockey rink again. Imagine if Gretzky only took shots when he was absolutely 100% sure he wouldn’t miss. Would he ever have had a single 200-point season, let alone four of them? No way. Fear of failure would have led to paralysis, or at least cut way, way down on the total number of shots scored.

Great traders know that as long as the risk management is in place, it makes sense to take calculated risks.

You can prove this yourself with a simple math experiment. Imagine you had the chance to bet heads or tails on a fair coin toss – tails you lose $1, but heads you win $2. How many tosses would you sign up for?

I would take an infinite number of tosses at those odds (if anyone were fool enough to give them to me). Even losing half of the time, you come out way ahead… and the more you toss, the further ahead you get.

It’s easy to see this with a piece of scratch paper. Just tally up the wins and losses. After 10 tosses (assuming an equal split of heads and tails), you would be $5 in the black. After 100 tosses, $50 in the black. After 10,000 tosses, $5,000 in the black, and so on.

Keep in mind, too, that a good trading rule of thumb is to look for at least 3-to-1 upside on your trades (rather than just 2-to-1).

That is to say, don’t take a trade unless you think you have a fair and reasonable chance of making triple the amount you’re putting at risk. So if you have, say, $500 in planned risk on a position – the amount you stand to lose if stopped out – you want to have a realistic shot at $1,500 in net profits on the trade.

In fact, with 3-to-1 sizing guidelines and consistent risk management, you could actually be wrong 60% of the time… only getting it right 4 times out of 10… and still make a strong profit!

You can see this again with the math. Imagine a series of ten trades where you win four times (40%) and lose six times (60%). At 3-to-1 reward to risk, you come out six units ahead: (4 x 3 = 12 units of gain) – (6 x 1 = 6 units of loss).

Play Ball

To borrow from one last sport, just think of batting averages in baseball. Ted Williams was a hero for batting .400, which meant one of the best that’s ever played the game failed to connect 60% of the time. (And any multi-millionaire baseball player alive would give his eyeteeth to bat .400 today.)

You don’t ever want to be wrong intentionally, of course. But the best trading opportunities are often the slightly unnerving ones – like the blazing fast-ball screaming in at 90 miles per hour. Will it drop low and left or come right across the plate? If you’re in the game, you can’t be afraid to swing when the timing feels right.

Source: To Be a Great Trader, Think Like Wayne Gretzky

More from Money Morning:

The reality is that these bailout programs remain with us, meaning we must factor them into our efforts to scout out profit opportunities. And on that point, we see six primary areas of change and opportunity:

• The U.S. Dollar: By pumping an estimated $3 trillion into the global financial system, the U.S. government is setting the stage for the mother of inflationary conflagrations. According to classic economic theory, the greenback should be in an actual freefall right now – especially in the current low-interest-rate environment, where there’s the potential for still more rate cuts and for additional capital outlays by the U.S. government. And that’s just with the current administration. President-elect Barack Obama has made it clear that if an additional stimulus isn’t announced before he takes office, he’ll make that one of his first official acts. What’s saving the dollar, at least for now, is that there’s so much global uncertainty that the dollar is retaining its reputation as a “safe-haven” currency. And, for now, at least, a safe U.S. dollar trumps inflationary concerns. However, should global investors regain confidence for whatever reason, expect the dollar to decline sharply.
• Oil: Many people are focused on declining oil prices as a function of a perceived slowdown in global demand. We think that’s an erroneous analysis for three key reasons. First, oil is still largely priced and traded in U.S. dollars. That means that as the dollar has risen, oil has become correspondingly cheaper. In other words, much of the price decline we’ve seen can simply be attributed to a rise in purchasing power associated with a stronger dollar. Second, China, India and other newly capitalist (and still-reasonably robust) economies are still increasing their oil consumption at a rate that more than offsets the decline in consumption we’re seeing here in the United States and in other developed markets. And third, Brazil aside, there hasn’t been a major new discovery capable of offset global demand on anything more than a temporary basis for more than 30 years, and most major oil fields are in decline or soon will be. Increasing demand and diminishing supply are clearly bullish influences over the longer term. More immediately, however, a stronger dollar negates this and may well keep oil under $100 a barrel for much of 2009. Obviously a terrorist attack would change the ballgame significantly, meaning we could see a spike to levels exceeding our multi-year target price of $225 a barrel. A year ago at this time, we called for oil to spike well up over $100 a barrel, and touch $150, which it essentially did. Even with recent price declines, some energy-industry insiders are starting to subscribe to our bullish outlook: The Paris-based International Energy Agency (IEA) last week projected that long-term oil prices would reach $200 a barrel (although we think that will happen much sooner than the IEA does).
• Commodities: The story is much the same for commodities, in general, and we expect that longer-term investors will be amply rewarded. More immediately, the popular – though erroneous – assumption that a global slowdown will negate demand is driving prices lower, and may continue to do so for the next six months. Gold will be the most obvious casualty in this arena, as hedge-fund-redemption requests and margin calls continue to mount, which is why we expect the price of the yellow metal to remain lower far longer than most people expect (We’ll focus specifically on gold in an upcoming installment of the “Outlook 2009” series). When it does rebound, however, the returns will be high.
• Global Markets: There’s no doubt that the global markets have taken their share of lumps along with their U.S. counterpart in recent months. But we don’t expect them to suffer forever. Countries with high cash reserves as a percentage of gross domestic product (GDP) – such as China, India and Brazil – are becoming less dependent on the fractured U.S. consumer almost daily, and the economic decoupling we’ve seen developing for several years may really take hold in the New Year. This stands in direct contrast to the situation a decade ago, when the Asian Rim and South America were economic train wrecks and the United States and Europe held all the cash. Companies with significant global exposure to the Asian Region, Latin America and Europe – in that order – remain the best bets for relative safety and growth in 2009.
• Stocks in General: Many investors are questioning the wisdom of being in stocks at all. While we certainly understand the pain that sentiment is based upon – and are hurting, too – it’s important to remember that the last time stocks really performed this badly was during the 1930s. Investors who decided to “get out” entirely then missed the investment opportunity of their lifetime. Don’t make the same mistake. Data shows, unequivocally, that investors who buy when the world is going to hell in a hand basket –think 1932, 1942, 1982 and 2003 – enjoy the largest returns. That’s even true if you’re “early,” and buy ahead of the specific market bottom. However, history also demonstrates that investors who pile in at the market’s peaks – such as 1928, 1969, 1999 and 2007 — tend to incur the worst returns.
• Global Stocks in Particular: Led by cash-rich China, we expect global blue chips to remain the best relative bets for safety, income and appreciation potential in the New Year. We are especially focused on companies involved with infrastructure projects and with firms that derive substantial portions of their revenues from Asian consumers. The first is a no-brainer. According to the latest studies from a variety of sources, planned global infrastructure expenditures in this area exceed $40 trillion by 2030. There is not a bigger, more unstoppable trend on the planet today. If you want proof, notice that a big portion of China’s just-announced half-trillion-dollar stimulus package is devoted to infrastructure projects. Infrastructure companies there will certainly benefit. So will consumer-products firms that are positioned to benefit from the rise of an increasingly Asian consumer base, which boasts significant savings and pent-up demand. Many of the best companies are beaten down to the point that they now feature single-digital Price/Earnings (P/E) ratios – lower than we’ve seen in decades. Some are actually trading for less than cash value, despite a strong history of growth. And the companies we’re studying have solid cash flow – and excellent prospects of maintaining it.

Now for the $64,000 question – when could we see a rebound?

We don’t know for sure. Nobody does. History demonstrates that the first and second years of any newly elected U.S. president’s term are almost always problematic. When taken in isolation, we could see a scenario where this is countermanded by President-elect Obama’s planned stimulus, but given the potent combination of flagging earnings and slowing U.S. growth, we’re leery of doing so. 

On the other hand, for a variety of reasons, history also suggests that if we are to see a rebound, however nascent, the probability is highest for a resurgence starting in the middle of next year. First, since the 1970s, the time between the first and last market lows in any given bear market is an average of seven to eight months. If historical trends hold true, this suggests we could see a bottoming out by the middle of next year. That’s consistent and plausible, especially since other data shows U.S. recessions, on average, last 14.6 months – which also points to a bottoming out in late spring or early summer.

But the biggest indicator of all that we may see a bullish rebound in late spring or early summer – however slight – is admittedly based on emotion. Literally. Small investors have fled the stock markets in droves, and so far they’ve yanked more than $175 billion from the markets, with nearly 50% of that coming out during October alone. Granted, this is a mere 3.2% of the $5.5 trillion invested in stock market funds, according to Forbes, but it’s the first year that net equity flows have been negative since … a drum roll please … 2002.

History shows that small investors may be the most telling of all Contrarian indicators. According to TrimTabs, the Investment Company Institute and our own proprietary research, individual investors have a remarkable habit of rushing in near market tops and fleeing near market bottoms.

That means that long-term investors seeking the best wealth-building opportunities should find the immediate price declines we see ahead to be some of the most compelling buying opportunities of their investing lifetimes.

Now for the caveats – and you knew this was coming – we see three wildcards in 2009, and any one of them could prove to be a joker:

• The continued de-leveraging of hedge funds and other financial institutions.
• More credit-default-swap valuation problems.
• And unknowns associated with the ongoing U.S. and global-economic-system bailouts.

There are still huge questions regarding who owes what to whom, how large the debts are, and exactly who’s going to get what help and when. History shows that the most effective bailouts are those that recapitalize institutions and that allow the weak to fail, which is why we are especially leery of the U.S. government’s plan to acquire bad debt while rewarding weaker institutions that should be put out of their misery.

What’s more, as a Money Morning investigative story demonstrated, many banks are using the government bailout money as takeover capital, and not to boost their lending, which at least would have had an expansionary benefit for the U.S. economy. With most of the bailout programs, and through no fault of their own, U.S. taxpayers and investors have been caught in the middle – or left on the sidelines altogether.

The Outlook 2009 Action Plan

For investors who want to get a head start, it’s important to bear in mind that the markets tend to begin their rebound in earnest anywhere from two months to six months before an actual economic bottom. While that doesn’t suggest going “whole hog” into stocks, it does speak to the need to take some steps now to get ready. Here are the top moves to make now:

• Rebalance Now: As markets have declined, many portfolios have done out of kilter, too – not only in terms of value, but in terms of balance. And that lack of balance can seriously dampen returns, even as we await the market recovery – and even more so once the market begins to rally. It’s far harder to catch a moving train than most investors think.
• Think Safety First: There’s no need to rush into the markets. It’s not clear we’ve hit bottom yet. Keep your powder dry for the better days and easier trades we see developing ahead, while bargain-hunting for those stocks with true upside, and that are positioned to capitalize on the strongest global trends.
• Spread your buys over several days: When you’ve found something to buy, wait for a particularly bad day, then place your order in the last half an hour of trading. Leverage the lower prices (and maximize your returns) by spreading your purchases over several days or weeks. That way you won’t get tripped up by committing your entire nest egg when the market looks cheap and will probably get cheaper.
• Go Global: China is still on track for 9.6% growth this year and may, in fact, slow to a “mere” 8.0% next year. Even that reduced growth rate will probably be about eight times the growth rate of the U.S. economy – if we’re lucky. Consider adding exposure to the Asian Rim as part of the rebalancing process, or as a primary focus once the recovery begins in earnest.
• Get Inverted: Continue to use specialized inverse funds to hedge downside risk. We’re not out of the woods by a long shot.
• Stop Your Losses – with Stop Losses: By all means include trailing stops to control small losses before they become catastrophic ones. This market could easily fall further before it gives way to the rally that history suggests is in the making.

Source: Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009

You also have to know that the Social Security System was flushed away by congress a long time ago. The general fund, or the excess contributions made to Social Security for the last 50 years, was squandered along with another nine trillion dollars.

That leaves all of us over 50 with the responsibility of funding most, if not all of our retirement. Unfortunately, the down turn in the stock market, as the result of congress mandating that Fannie Mae (FNM) and Freddie Mac (FRE) guarantee mortgages to people who could never possibly pay for them, has crushed an entire generation’s retirement funding.

The simple fact is, since ‘87, the majority of Americans have poured almost all of their retirement dollars into stock mutual funds in their IRA’s and their 401k’s. Prior to the mid 80’s all of it went into bank investments. Our exposure to the stock market is the largest and most wide spread ever. Losses in investments this time will be much greater than 1987.

Time has almost run out! For the majority of Boomers there is only one more opportunity to secure their retirement. Most of us will live far below what we should have been able to afford no matter what we do. But, if we don’t spend the next ten years doing more than playing the stock market lottery, we are in deep kimshi.

Every person over the age of 50 has no choice but to shift into a reduced risk investment strategy. We no longer have enough time in our working lives to wait out another disaster in the stock market. We also cannot delude ourselves that we will somehow avoid another huge down turn in the market.

The truth of the matter is that the very nature of the stock market is to flush out the weak every few years. No one knows what will cause the next explosion, but it is coming.

There is some good news. Holy cow! Do we need some good news, or what?

Reduced Risk Portfolio.

Most investors avoid this type of strategy because it implies stodgy, turtle like returns. But if you reduce the risk level of your holdings by diversifying into corporate or tax-free bonds, you don’t necessarily reduce your return. In fact, history has taught us you actually increase your overall return because you don’t give back any in a correction, almost zero.

The stability bonds add to your portfolio will actually let you sleep at night. You know going in exactly how much you will make and exactly when it will appear in your account. And with a little effort, you can see the same returns from bonds that the stock market has produced long term.

In the past few corrections you ended up giving back almost as much as you earned during the Bull Run. The really sad part is that most people have to get hit over the head many times to get the message. Most have nothing left by the time they learn the truth about stocks.

The critical point for the boomers reading this is, you don’t have the time anymore to wait out another correction. If we get slammed again, we don’t have the working years left to replenish our accounts. We will be up the proverbial creek. This is your last window of opportunity to secure a retirement.

If there is any good to come of this sell off it may be a final wake up call for us to stop playing Vegas with money we can’t afford to lose. We are not 35 years old anymore with 30 years to get it right. Get it right this time or learn to live below the poverty level.

In my head I am still 25. I am still thin, fast and almost immortal. But my lower back tells me loud and clear I am 55. We all need to feel our age in our wallets, too.

This country is on the verge of a financial tragedy. If the baby boomers don’t wake up and get their money house in order, we could be setting up our children to live at the third world level. The financial burden of keeping us in our old age will make their lives a mere shadow of what we have known.

Our time is not running out, our time is up.

Let the other guy go down with his ship. We live to fight another day.

Source: The Baby Boomers’ Last Window of Opportunity

Right now, the lowering strategy is winning, and the lower U.S. dollar interest rate means that investors are likely to park their investments and savings in other currencies that pay higher returns. This reduces demand for dollars and means the dollar may fall even more against other currencies.

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This creates the perfect Multi Currency Sandwich position…an investment strategy that borrows a potentially weak currency at a low interest rate and invests the loan in a potentially strong currency at a higher rate of return.

The troubles of the U.S. dollar are so serious right now that one opportunity–unimaginable in the 1980s and 90s–is to borrow U.S. dollars to invest in Russian rubles!

Russian political stability looks strong with the new president Dmitry Medvedev assuming office. But Russia is facing many economic challenges, especially inflation. One way the Russian central bank will likely solve this is a revaluation of the ruble. This creates the potential for significant gain due to the interest rate differential between the ruble and the dollar…in other words, a “positive carry.”

My banker at Jyske Bank just offered a Bank of Moscow bond issue that matures in 2009. The bond has a coupon of 7.25%, but sells at a slight discount so the yield is 7.35% per annum. Because of falling interest rates in the U.S., Jyske Bank will lend you dollars for 4.5%. This means you make 2.85% positive carry by using Bank of Moscow bonds to borrow dollars.

For example, say that you invest $100,000 in the Bank of Moscow bond mentioned above. You earn $7,350 a year interest. If you use that $100,000 bond as collateral and borrow $200,000, your cost for the loan at 4.5% per annum is $9,000 a year.

You use the borrowed $200,000 to buy Bank of Moscow bonds, increasing your yearly interest income to $14,700, or $5,700 more than the interest cost of your dollar loan.

Now your total return on the $100,000 you originally invested is $13,050. Your Multi Currency sandwich has nearly doubled the return on your investment. Plus, since your Bank of Moscow bond is actually bought with and denominated in rubles, you stand to gain on any appreciation of the Russian currency as well. If the ruble appreciates 10%, your Forex gain would be $30,000…a nice bonus.

Fundamental fiscal conditions in the U.S. suggest that the greenback will remain weak. Economic conditions point toward continued low dollar interest rates. However, there is always a risk of reversal of rising interest rates and a stronger dollar versus the currency you invest in. I suggest using this technique only for mid- to long-range investment timeframes…five or more years. And never leverage more than you can afford to lose.

Gary Scott
For International Living

Editor’s Note: Gary has been dealing with bonds and currencies for almost 40 years. He never worries about the value of the dollar, or the recession as there are always currencies…and companies…that can weather the storm…even prosper…over the long term. To see how you can do this, too, read this special report.

Source: Safe Bonds with 7.35% Yield