And it’s this time component that is a critical factor when it comes to valuing the price of a LEAP option and the amount of risk involved.

An option’s price is determined by a computer program – either the Options Pricing Model or the Black-Scholes Model. Black, Scholes and Merton developed the latter model in the 1970s, winning a Nobel Prize for it.

Essentially, both models take the same main factors into account…

• The amount of time until expiration.
• The price of the underlying shares.
• The volatility of the share price.
• The risk-free rate of return.

Let’s take a look at these factors, so you know how to pick the right options with the best chance of yielding handsome profits…

Put Time on Your Side With LEAP Options

Time Until Expiration: When most people think about options, they think about getting the biggest bang for their buck and profiting in the shortest amount of time.

But be careful, because it isn’t that simple. With short-term options, time is against you. If the outcome you desire isn’t achieved within a short period of time, your option expires worthless.

However, LEAP options give you plenty of time for you to be correct and profit from the trade. Time is a critical component of a LEAPS trade.

• For example, I’ve seen a LEAP option on a gold stock recommendation move from the $3 price we paid, to $0.50, then right back up to $16… all during a 12-month period.
• Contrast that with a short-term option, which would have flamed out a long time before the share price recovered.

With LEAPS, you have time to withstand a bad earnings report, a market correction, a terrorist attack, or a plethora of other shocks that would otherwise mean a world of hurt for your position.

Stock-Watching: How the Share Price Affects the Option Price

Price of the Underlying Shares: It stands to reason that the price of the underlying shares is another key factor in determining how much you pay for the LEAPS options.

Basically, the closer the strike price (the price at which you have the right to buy or sell the stock) is to the current share price, the more expensive the option will be.

• For example, if IBM (NYSE: IBM) trades for $100, a $95 call option would be considered in-the-money since the strike price is less than the current option price. In this case, the option premium will have intrinsic value. For example, if the option cost $9, $5 of that would be intrinsic value and $4 would be the amount paid for time and risk.
• If your option is out-of-the-money, you pay for time and risk. So if IBM was at $100 and you bought a $105 call option for $5, the entire $5 would be for time and risk. But while the option premium is less than an in-the-money option, the probability of winning is also lower.

How Much Will Your Option Move? This Volatility Number Will Tell You

Volatility: When we talk about volatility here, we’re referring to how the share price performs in relation to the broader market. This is known as a stock’s beta.

Simply put, a stock with a beta of 1 will move in line with the market. A number under 1 means it’s less volatile, while a number higher than 1 means it’s more prone to volatility. So if the S&P 500 moves down 1% and your stock moves down 2%, your stock has a very high beta – double that of the market.

The higher the beta, the more expensive the options are, since options have the ability to move with greater speed in either direction.

• For example, the beta on shares of tech giant Apple (Nasdaq: AAPL) will be much higher than the beta on a stodgy pharma company like Procter & Gamble (NYSE: PG).

Risk Free Rate of Return: Measuring the cost of money at the cheapest possible price and the best possible return with no risk, this final factor is usually associated with government Treasury securities, especially 10-year Treasury bonds.

Together, these four features – time to expiration, underlying share price, volatility and risk-free rate of return – represent the critical components in determining the price of LEAP options (or any options, for that matter).

Next time, we’ll explore the economics of the LEAP strategy along with how you can invest in the market with 15% of your cash while the rest of the world is foolishly using 100% of theirs.

Good investing,

Karim Rahemtulla

Source: Put Time on Your Side With This Trading Strategy

The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.

The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).

The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.

That probable victory has major implications for investors.

• For starters, let’s consider the big exporting companies. Such players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR: SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less prominent, as they won’t have such strong backing from the government bureaucracy. The construction companies – Komatsu Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),Sumitomo Realty & Development Co. Ltd. (OTC: SURDY) and the like – will do less well.
• On the other hand, domestic-oriented companies, particularly in consumer products, should benefit. Low-end consumers may do better than high-end, so we’ll look for basic goods.

The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well. Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable. How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go. Here are the seven ways to play Japan’s election (with one bonus pick for good measure):

• Kao Corp. (4452; OTC ADR: KCRPY) is a classic consumer-products company – kind of like a Japanese version of The Procter & Gamble Co. (NYSE: PG) here in the United States. Kao produces cosmetics, laundry and cleaning products, making it a domestically oriented company that should do well as Japan’s consumer spending improves. Stock stats: The company’s stock trades at 17 times earnings and yields 2.7%.

• Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces beer, soft drinks, food products, whiskey and pharmaceuticals. In addition to its strong position in Japan, Kirin is a major player in the East Asian market. Stock stats: P/E ratio 16; stock yields 1.6%.

• Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a nationwide convenience store chain that sells food, beverages and gaming software. Stock stats: P/E ratio 13; dividend yield 2.7%.

• QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise, salad dressing, egg products and health foods. Stock stats: P/E ratio 17; dividend yield 1.5%.

• Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces and sells flour, cooking oils and confectionary products. Stock stats: P/E ratio 19; dividend yield 2.4%

• Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY) is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It operates convenience stores, food stores and fast food restaurants.Stock stats: P/E ratio 22; dividend yield 2.5%.

• Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and sells prescription drugs and medical equipment in Japan and overseas. Stock stats: P/E ratio 19; dividend yield 4.2%.

Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15. 

Source: Eight Ways to Profit From Japan’s Game-Changing Election

Editor’s Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world’s financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold and specially designated “Alpha-Dog” stocks into high-income/high-return portfolios for subscribers. Hutchinson’s strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash – only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.To find out about this strategy – or Hutchinson’s new service, The Permanent Wealth Investor – please just click here.

But by the end of the month, Immelt’s resolve had collapsed under the weight of the global financial crisis and his company announced its first dividend cut since the Great Depression. GE slashed its payout by more than two-thirds, from 31 cents to 10 cents per share.

GE is not alone. Companies typically abhor dividend cuts, as they are widely viewed as a sign of desperation. But lean times – like those we’ve experienced in the past year and a half – have left even the proudest U.S. firms with little recourse.

By cutting its dividend, GE will save about $9 billion a year.

The 117-year old American icon was joined by a record number of companies that issued dividend cuts in the first quarter of 2009. Companies slashed a total $77 billion from investor payouts in the three months ended March 31. For the first time since 1955, dividend cutbacks actually outweighed dividend increases.

“While the number of dividend decreases is at a record high, the number of increases has set a new record low,” said Standard & Poor’s Chief Index Analyst Howard Silverblatt.  “The average has been for every 15 increases there is one decrease.  Now it is three increases for every four decreases.”

The long list of businesses that have cut their dividends reads like a “Who’s Who” of Corporate America.  Bank of America Corp. (NYSE: BAC), Citigroup (NYSE: C), Motorola Inc. (NYSE: MOT), CBS Corp. (NYSE: CBS), and Pfizer Inc. (NYSE: PFE) were among the victims.

Now that even America’s proudest, most-reliable labels have reduced their payouts, it’s hard to tell exactly which companies will be the next to cut their dividends. But here are some simple rules to follow when looking for a safe place to invest your money for long-term dividend growth.

Three Rules for Dividend Investing

Dividends remain a critical element of investing success, Money Morning Investment Director Keith Fitz-Gerald has repeatedly said. That’s especially true in the uncertain, whipsaw market conditions that have dominated since last fall.

According to Fitz-Gerald, one study by Ned Davis Research is particularly telling, noting that dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005. Non-dividend paying stocks, in contrast, posted gains of just 4.1%.

Other experts say there are three rules to follow in order to identify companies whose dividend payouts are likely to remain in place – or even grow.

1. History Repeats Itself: Look for companies that have a history of raising their dividend.  For some organizations, dividend growth is a top priority and their track record will show that.  Although GE is clearly an exception, if a company has consistently raised its dividend for decades at a time, it will likely continue to do so.
2. Earnings vs. Payout: Research is key when investing in any stock. When looking at companies that offer a dividend, a good question to ask is: “What does the company pay per share versus its assets and earnings?”  Dividend payouts cannot grow if a company’s earnings do not grow, so check a company’s earnings history.
3. Black-and-Blue Stocks: Avoid stocks whose earnings have been hammered. While in today’s market most stocks are beaten down, stocks valued below $10 a share are generally there for a reason.

Three Companies That Are Unlikely to Cut Their Dividend

NYSE Euronext (NYSE: NYX): NYSE Euronext is a diverse exchange group that offers a 4.69% dividend yield, making it an extremely attractive investment opportunity. While the company was hit hard during the beginning of the recession (trading at over $100 a share to a meager $25.59 as of yesterday’s close), it still shows strength for long-term investment.

“The dividend is intact for 2009 and we have no plans to change it,” NYSE Euronext Chief Executive Officer Duncan Niedereaur said during a recent appearance on the 1,000th episode of CNBC’s “Mad Money.”

NYSE Euronext completed its takeover of the American Stock Exchange (AMEX) in October.  And the company has seen a tremendous improvement in its overall trading activity over the past month. Its cash equity business is up 11% on a month-over-month basis, and its U.S. consolidated equity volumes were close to record levels at 12.3 billion shares.  That’s a 48% increase from last year, and a 12% jump from February.

Additionally, the U.S. Securities and Exchange Commission (SEC) recently had a hearing and ruled unanimously in favor of reinstating five rules against short selling following the guidelines of the former “Uptick Rule.”  This ruling is important to the Big Board’s growth because short sellers helped drive down share prices.

The recession that’s plagued the markets over the past year and a half has severely diminished trading volumes, and therefore the profits of the New York Stock Exchange. The newly established rules on short selling can only make the company stronger.

“We are a three-year-old public company,” CEO Niedereaur said. “Long-term prosperity for this company is based on fairly run markets and the reinstatement of the uptick rule is a major plus for this company.”

Johnson & Johnson (NYSE: JNJ): Johnson & Johnson is a strong company with a solid dividend that yields 3.51%. Its stock remains undervalued, down 23% from its 52-week high of $72.76 a share.

Johnson and Johnson is the quintessential dividend growth stock. Its dividend has grown 14.10% on average every year since 1999.  A growth rate that high means the company’s dividend is doubling about every five years.  This has been the pattern since 1974.

Last year, JNJ’s revenue was $63.7 billion, producing a net profit of $13 billion – an increase of 22% from 2007.

JNJ’s most recent acquisition of Mentor Corp. (NYSE: MNT), a global supplier of medical products for the cosmetic-surgery market, gives JNJ the opportunity to compensate for a decline in its pharmaceutical sector (the unit has cut more than 900 sales jobs and is dealing with drug-approval  issues).

“Mentor will become the cornerstone of a broader Johnson & Johnson strategy for aesthetic medicine – serving both consumers and medical professionals,” Johnson & Johnson Chairman Gary Pruden said in a statement. “We will use our combined strengths and experience to build a market-leading aesthetic business that capitalizes on Johnson & Johnson’s broad-based commercial capabilities, worldwide surgical care footprint, and clinical scientific capabilities.”

The Proctor & Gamble Co. (NYSE: PG): Proctor & Gamble offers a healthy dividend of $1.60 a share, yielding 3.26%. At $54.02, its stock down 26.5% from its 52-week high of $73.57 share.

P&G is another example of a classic dividend growth stock:  It has been raising its dividend for the past 55 years. For 10 consecutive years, P&G has delivered its shareholders an annual average return of 3.10%.  Since 1973, dividend payments have doubled every seven years.

Proctor & Gamble offers branded consumer goods that branch off into three global markets: Beauty, household care, and health and wellness. Many common household items come from this company, such as Gillette Co. shaving products, Tide laundry detergent, Pampers baby diapers and Bounty paper towels, to name a few. During troubled times, a stock such as this is often a nice defensive play, since families are unable to do without these items.

“Today we reach a little more than half of the world’s 6.7 billion consumers,” Proctor & Gamble CEO Alan G. Lafley recently told BusinessWeek. “We want to reach another billion in the next several years, and much of that growth is going to be in the emerging markets, where most babies are being born and where most families are being formed. We see growth across our entire portfolio.”

Since 61% of P&G’s sales come from outside the United States, a weaker dollar is going to be a large factor in this company’s success.  A weaker dollar makes U.S. made exports cheaper for foreign consumers to buy. While the company is timid about its earnings and fears that business conditions may have slowed from last year, the Cincinnati-based company raised its dividend in March.  From an investment-research standpoint, increasing dividends despite expectations of a decreased consumer market is typically a good sign.

Source: Three Dividend Plays That Can Offer Stability in the Face of Uncertain Financial Markets

There was more money available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money market funds was equal to 74% of the market value of U.S. companies, the highest ratio since 1990, according to the Federal Reserve.

What happened in the past when cash reached these levels?

• In September 1974, cash on hand reached $604.5 billion, representing a record 1.21 times the U.S. stock market’s capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.
• In July 1982, just as a 20-month bear market was ending, cash as a percentage of the U.S. stock market’s value rose to 95%. The S&P 500 began a six-month, 36% advance. According to Bloomberg, the eight previous times that cash peaked compared with the market’s capitalization, the S&P 500 rose an average 24% in six months.

This time, of course, it didn’t take nearly as long for the market to rally.

Still, the greatest appreciation so far has been in smaller stocks. That’s normal in an early bull market. But if the bull market continues, the big, blue-chip stocks are likely to lead the market higher for two key reasons:

• First, there is still over $8 trillion on the sidelines earning next to nothing in short-term deposits. Investors tip-toeing back into the market are likely to gravitate here since these stocks are the safest.
• And then there is the growing influence of cash-rich sovereign wealth funds…

Sovereign Wealth Funds – The Financial Assets of a Country

Sovereign wealth funds are the financial assets of a country – usually part of the national savings – that are owned and organized into a state-controlled fund and put to work to earn a higher return on investment.

(Sovereign wealth funds are not the same entities as foreign exchange reserves, which are often used for short-term currency stabilization and liquidity.)

In the past, most countries put their liquid assets to work in foreign currency deposits, government bonds or gold. (The hard-working Japanese and Chinese, for example, have kept our interest rates low by maintaining a steady appetite for U.S. Treasury obligations.)

But with the dollar relatively weak and interest rates on Treasuries near record lows, U.S. government bonds are not generating the kind of returns you write home about.

So world governments are slowly moving money into global equity markets. And the sums involved are fairly staggering.

Sovereign Wealth Funds Control More Than $7 Trillion…

According to The Economist, sovereign wealth funds already control more than $7 trillion today. The exact amount is impossible to ascertain due to lack of transparency.

But China, Saudi Arabia, Singapore and the United Arab Emirates alone are known to control more than $2 trillion. And more money is being allocated to these funds all the time.

What does this mean for you as an investor?

Expect to see cash coming off the sidelines to accumulate shares of the largest, most liquid firms around the globe. Quite frankly, they are the only companies that can easily absorb buying on this scale.

For example, take a look at the Dow Jones Global Titans Fund (NYSE: DGT). It holds the world’s 50 largest publicly traded companies.

World-Class Diversification in a Blue-Chip Portfolio

When you buy this cheaply valued blue-chip portfolio, you’re getting world-class diversification.

Companies like:

• Exxon Mobile (NYSE:XOM),
• IBM,
• Proctor & Gamble (NYSE:PG),
• Wal-Mart (NYSE:WMT),
• Coca-Cola (NYSE:KO),
• Nestlé,
• Toyota Motor (NYSE:TM),
• Roche Holdings,
• Samsung Electronics

… Are just a few of the names that are major holdings of the DGT fund.

These firms will almost certainly be an early stop for U.S. investors who get frustrated with low yields and start venturing back into the game.

These same companies are a natural home for sovereign wealth funds – and the growing trillions they control.

History shows that cash on the sidelines always grows itchy with time. The Dow Jones Global Titans (NYSE: DGT) is a good way to take advantage of it – ahead of the crowd.

Good investing,

Alexander Green

Source: Sovereign Wealth Funds: $7 Trillion Reasons to Stay Invested

There is one way to consistently and reliably make a fortune in the stock market.

It has nothing to do with buying options or shorting stocks. You don’t have to time the market. And it doesn’t involve finding the “next big thing” or the latest technology. Without a doubt, history shows that the biggest and most reliable returns in the market come from the safest and most mature companies.

Specifically, the key is to buy the highest quality companies you can find – companies that pay dividends and have a history of raising those dividends over time. Buy these shares when they are cheap and reinvest the dividends. That’s it. The combination of rising dividend payments and reinvesting those dividends invokes the magic of compounding.

Let me show you what I mean. Market research firm, Ibbotson Associates, has calculated U.S. stock market returns going back more than a century. Their study shows that if you invested $1 in large U.S. companies in 1925, you would have had $98 in 2005. Had you reinvested the dividends, your $1 would have become $2,658.

The same $1 invested in 1824 would have become $374 in 2005… or more than $3,000,000 with dividends reinvested.

But by no means do you have to invest for a century or even a quarter of a century to capture the power of compounding reinvested, rising dividends.

Had you invested $10,000 in Johnson & Johnson in 1989, you would have purchased 126 shares. After splits and by reinvesting your rising dividends into more shares, you would have 2,868 shares today, worth $150,862. That is a return of 1,408%. And your initial investment would now provide you with more than $5,621 a year in dividends… the equivalent of a 56% annual yield on your initial investment!

This is how Warren Buffett’s original shares in Coca-Cola (purchased in 1988) now provide a yield of 32% on his original investment… the equivalent of several hundred million dollars per year.

Opportunity is Knocking…

With many of the best dividend-raising companies trading at a significant discount to their true value, there has rarely been a better time than NOW to build a portfolio of these stocks.

Companies that have a long history of raising their dividends are the strongest and most stable companies in the market. That means they not only provide the safest shelter in the storm, many of them actually benefit from a recession.

Companies can respond to a severe economic downturn in one of three ways. They can:

1. Die. Many companies have already declared bankruptcy and many more will before this downturn is over.
2. Survive. These are the companies that downsize, cut expenses, lower prices, close factories and stores, sell assets and cut dividends.
3. Grow. These companies may cut expenses and become leaner, but they also increase their market share by swallowing the minnows and beating up the weaklings. They fill in the competitive gaps that retreating companies have left behind.

Surviving is better than dying. But you want to invest in companies that can continue to grow and increase their competitive advantage.

While other companies play defense, protecting a diminishing pile of cash and by getting smaller and slashing assets. Other companies become bigger by buying assets (heavily discounted assets, at that). Recessions and downturns actually make these companies stronger.

As an investor, you shouldn’t fear a bad economy and a bear market. You should embrace them. If your retirement is more than a few years away, the crash in asset prices is not a crippling blow. It is a gift that comes along rarely. It takes bad times to push the price of great stocks down far enough to make huge returns over time.

And great stocks have rarely been as cheap as they are today.

If you have a time frame of 5 to 20 years and you’re looking for investments that can provide you with 1,000% to 10,000% gains, consider investing in companies like Wal-Mart, Proctor & Gamble, Verizon Communications and Emerson Electric.

Average into your positions over time, continue to invest, and then reinvest the dividends back into more shares. There is no more reliable way to become wealthy in the stock market.

Source: The Stock Market’s Greatest Secret

Companies that have followed a policy of consistently increasing dividends have historically outperformed the market.  And the best part–they put a growing stream of cash in your pocket.  Plus, steady dividend growth helps counter inflation which could rear its ugly head due to rampant government spending.

We are still suffering from a financial crisis and global recession… these are still risky times for investors.  One great way to ride out the turmoil is with blue-chip stocks that keep raising dividends.

Another key factor to success is investing in companies that are dominating players in their business.  If you are the key player in your sector then you can raise prices to keep up with inflation.  The market leaders can easily raise capital and survive economic downturns.  These companies are mature cash cows that funnel their excess cash to investors in the form of dividends.

Invest in the 800 pound gorilla!  The one that can crush their competitors by lowering prices if need be.  Recessions and downturns actually make them stronger, because it flushes out the weak players in their space–and they gain market share.

Here are some of my favorite blue chip stocks with steady dividend growth and income.  In addition, they are the dominate player in their industry:

Procter & Gamble Co. (PG) provides branded products of superior quality and value to improve the lives of the world’s consumers.  They run a great business and own some of the world’s best brands like Tide, Duracell, Pampers, Gillette and many more.  P&G has increased its dividend for 53 consecutive years.  I believe they will continue to deliver dependable sales and earnings growth over the next several years, benefiting from growth prospects in new markets.

Wal-Mart Stores Inc. (WMT) is the biggest retailer in North America and has set its sights on other parts of the world.  They do great during times of economic downturns because people turn to discount retailers which offer more goods for less money.  Wall-Mart has vast economies of scale and can offer consumers cheap goods while turning a tidy profit.  WMT has increased its dividend for 26 consecutive years and is well positioned to gain market share in an adverse economic environment.

Exxon Mobil Corp. (XOM) is the largest publicly traded integrated oil company on earth, serving customers in over 200 countries.  XOM is well positioned to benefit from higher crude oil prices and is one of the best managed companies in the energy sector.  XOM has increased its dividend for 26 consecutive years and has excellent earnings and dividend growth and stability.  They have $32 billion in cash sitting in the bank which will allow them to gobble up competitors and gain market share.

The Coca-Cola Company (KO) is the world’s largest producer of soft drink concentrates and syrups, as well as the world’s biggest producer of juice and juice-related products.  Coke will benefit from higher retail prices as inflation kicks in.  Plus, global demand for Coke’s products has virtually unlimited potential.  Furthermore, people continue to drink Coke’s products during recessionary times like these.  They have increased their dividend for 39 consecutive years.  KO will continue to be a cash cow and pay you a hefty dividend for years to come.  Invest in and Drink Coke…

Please keep in mind that the current rally could run out of steam and we could experience a major market pullback in the near term.  Therefore, you may not want to take a full position in these stocks right now.  Take a position over time by buying in small lots.  Or, wait for a market pullback to get a better entry price.  These are some of the highest quality stocks around, but they are not immune to a market selloff.

If you’re looking for more high quality income producing stocks I suggest you subscribe to my colleague Andrew Gordon’s Income letter.  He has an excellent portfolio of income producing stocks and the newsletter is only $99 per year.  Get more information on Andrew’s Income newsletter here.

Source: Buy Quality!

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

“I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,” Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

“Most banks will have to raise capital in some form,” Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. “The capital raises will be much bigger than people think.”

Miller said that uncertainty about what the tests might reveal has made banks stocks “uninvestable” in the near term.

The issue for investors is that “you just don’t know how the government is going to view it,” Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Why wait for the U.S. Treasury Department’s bank stress test when Money Morning can highlight the four secrets that will let you separate the winners from the losers in the U.S. banking system?
Call it the “Money Morning Bank Stress Test.”

Money Morning Contributing Editor Martin Hutchinson last week evaluated the 13 largest U.S. banks and rated them as either “Zombies,” “Walking Wounded,” “Risky But Proud,” and “Hidden Gems,” and concluded that nine of the banks pose some degree of risk. But he also found that four of the financial institutions are “Hidden Gems” that might be worth a look for investors.
On Thursday, we’ll finally see how it all plays out.

Market Matters

Chrysler LLC filed for bankruptcy and then forged a potentially “game saving” partnership with mighty Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer.  General Motors Corp. (NYSE: GM) will be saying good bye to its Pontiac brand (any interest, Fiat?).  Bank of America’s Ken Lewis was stripped of his board chair, but will continue to put out fires from the chief executive office.   Earnings season moved forward and Exxon-Mobil Corp. (NYSE: XOM) did NOT set a new record for a change.  International Business Machines Corp. (NYSE: IBM) bucked the cost-cutting trend and actually raised its dividend.

With Treasury set to release the stress test results on Thursday, rumors are circulating that Bank of America and Citigroup may be in need of additional capital, though both are pleading their cases.  Meanwhile, Citi began lobbying for permission to pay retention bonuses to key employees [it worked for American International Group Inc. (NYSE: AIG) and Merrill Lynch (NYSE: SQD)], who may seek the greener pastures of other (ailing) financial institutions.

Telecommunications firms were in the spotlight early in the week as chipmaker Qualcomm Inc. (Nasdaq: QCOM) raised its revenue outlook and Verizon Communications Inc. (NYSE: VZ) actually announced increased earnings in the first quarter.  Verizon may be teaming up with Microsoft Corp. (Nasdaq: MSFT) to develop its own touch-screen cell phone to cut into Apple Inc.’s (Nasdaq: AAPL) iPhone market share.

Drugmakers Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY) posted quarterly results that beat Wall Street expectations, as did The Dow Chemical Co. (NYSE: DOW) and Starbucks Corp. (Nasdaq: SBUX), though the latter’s major restructuring (store closures) prompted a 77% decline in profits.

MasterCard Inc. (NYSE: MA) confirmed that 2009 will be a challenging year, though rival Visa Inc. (NYSE: V) beat earnings estimates, as debit card usage increased, resulting in greater fee income.

The Procter & Gamble Co. (NYSE: PG) struggled last quarter, with weaker sales, as shoppers traded down to lower-priced consumer goods.  Exxon-Mobil, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) were victims of the declining global demand for oil.  Still, Exxon’s long-term outlook remains strong as the company continues pouring money into development projects to be fully prepared once the recession ends.  In fact, management even boosted its stock dividend.

Economically Speaking

While the U.S. Federal Reserve seemed to offer some “cautious optimism” about the overall direction of the economy, the policymakers avoided any sugarcoating and hedged their comments for fear of an unforeseen development (such as the “swine flu,” also known as the A/H1N1 flu).

While the virus quickly expanded across the globe, most of the worst cases have been limited to Mexico, where the already depressed economy will be further impacted from business closures and travel restrictions.

When SARS (Severe acute respiratory syndrome) hit in 2003, China’s gross domesic product (GDP) was estimated to have been hurt by about 1%; According to early projections by Moodys Corp.’s (NYSE: MCO) Economy.com, the Mexican economy will contract by 6.2% in 2009 (revised from the -4.5% estimate to account for the flu).

The Fed plans to leave rates at near 0.0% and stands prepared to purchase more Treasury and mortgage-related securities to keep the economy moving in the right direction.

The first quarter’s gross domestic product (GDP) highlighted a relatively hectic week on the economic front.  While the economy contracted from January through March at a worst-than-expected 6.1% clip, analysts found some positives deep within the release, as consumer activity actually picked up during the quarter.

The spending component rose by 2.2%, after falling by 4.3% in the fourth quarter.  Additionally, a decline in inventories hindered the release; however, economists point out that such a reduction indicates that manufacturers have scaled back production and will not be burdened with excessive supplies that may need to be deeply discounted to be sold. As demand slowly returns, they will be able to boost production once again.

Meanwhile, consumer confidence surprisingly soared to levels not seen since November 2008, which is especially good news, since the consumer accounts for about two-thirds to 70% of the activity in the economy.

Weekly Economic Calendar

Source: Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

Bank of America Corp. (BAC), which reports today (Monday), remains among the last financials of note that has yet to announce its first-quarter performance, and the big bank figures to get a lot of attention as investors look to see how well Merrill Lynch & Co. Inc. (formerly known as “The Bull”) and Countrywide Financial Corp. have fit into the BofA family fold.

International Business Machines Corp. (IBM) (today) and Apple Inc. (AAPL) (Wednesday) will give investors a better idea of just how well the tech sector – which up to now has been quite hot – is really doing. Amazon.com Inc. (AMZN) (Thursday) will give investors an inside look at the health of the retail sector – especially the online variety.

Coca-Cola Inc. (KO), which reports tomorrow (Tuesday) and McDonalds Corp. (MCD) (Wednesday) should help us see whether consumers are so gassed that they can  even afford dollar sodas and burgers (or are buying more in lieu of dining at more-expensive restaurants).

Several economic reports will be worth a look, too. Home sales data for March highlight the economic calendar and analysts are eager to see whether February’s enhanced activity was the start of a trend or just an anomaly.  Interest rates are down; home prices are low, first-time buyers have tax incentives to buy.  Could the February and March numbers represent the start (continuation) of a housing rebound?  It’s going to happen at some point, and don’t forget that housing expert Andrew Waite, the publisher of the Personal Real Estate Investor magazine, recently told Money Morning that the recovery is already under way.

Market Matters

Strike up the band; let the good times roll; banks are making money again (or not losing quite as much). Earnings season moved along and financials led the charge with (somewhat) favorable reports.  Both Goldman Sachs Group Inc. (GS) and JP Morgan-Chase & Co. Inc. (JPM) announced better-than-expected quarters and key execs insisted they will pay back those TARP (Troubled Asset Relief Plan) dollars sooner than later.  While Goldman appears set to raise funds through a new stock offering (which will dilute current shareholders), JP Morgan insisted no similar issuance will be necessary.  With its $1.5 billion profit, Citigroup Inc. (C) looked quite promising relative to its $5 billion shortfall a year ago.  Still, some analysts claim the recent results reek of income-statement “shINTCenanigans” (and unsustainable bond trading gains), which is why they say that they will await the results of the independent stress tests in a few weeks, figuring that these  results will paint a more accurate picture of these banks’ operations.

Turning to techs, Intel Corp. (INTC) and Google Inc. (GOOG) reported stronger-than-anticipated quarters, but with caveats.  Despite claiming that the ailing computer industry may be “bottoming,” Intel refused to offer an outlook for the current quarter.  Google, on the other hand, enjoyed net-income growth, although the company experienced a decline in revenue (from the fourth-quarter 2008) for the first time in it five-year history as a public company.  While cell phone giant Nokia Inc. (ADR: NOK) suffered a drop in earnings, management reported optimistic signs of greater stability in the industry.  Conglomerate General Electric Co. (GE) posted a 35% decline in earnings, but still beat the Street outlook.  Airlines did not fare quite as well as both American Airlines parent AMR Corp. (AMR) and Southwest Airlines Co. (LUV) posted troubling losses, and warned of more turbulence to come.

In non-earnings news, The Procter & Gamble Co. (PG) bucked the recent cost-cutting trend and announced a dividend increase.  Mall owner General Growth Properties Inc. (GGP) filed for the biggest bankruptcy-protection case in the history of the real estate industry as the Chicago-based company attempts to restructure its debt positions, a move that underscores the concerns Money Morning recently raised as part of an investigation into the looming problems in the commercial real estate sector.

International Business Machines Corp. (IBM) moved beyond new Sun Microsystems Inc. (JAVA) overtures, claiming a reluctance to be drawn into a long antitrust battle.  Despite that failed deal, the boardrooms appear a bit more active these days as transactions highlighted the business news of the week.

American International Group Inc. (AIG) is selling its personal auto insurance line to Zurich Financial Services (OTC ADR: ZFSVY) for slightly less than $2 billion, the first of many such moves for the bailed-out insurer.

Express-Scripts Inc. (ESRX) will acquire WellPoint Inc. (WLP) for $4.68 billion to better compete with industry leader Medco Health Solutions Inc. (MHS) in the pharmaceutical-benefits-management space.

Rosetta Stone Inc., a language-education specialist, underwent an initial public stock offering (IPO) that reminded some of the “Go-Go” dot-com days as its stock soared about 40% on the first day of trading, the most successful offering in a year.

After five straight weeks of positive stock returns, U.S. stock experienced an early-week pullback, before charging ahead on the financials’ earnings reports.  “Six weeks and counting” have investors surmising that the rise may actually be more than a short-lived bear market rally (though the Nasdaq Composite Index remains the only key index in positive territory for the year).

Economically Speaking

Perhaps taking advice from spin-doctors, both U.S. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke last week put a more optimistic (though realistic) face on the current state of the economy.

Said Bernanke: “Today’s economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence.”

Said President Obama: “By no means are we out of the woods just yet, but from where we stand, for the very first time, we are beginning to see glimmers of hope.”

Additionally, the Fed Beige Book reported an ongoing contraction throughout the country, but implied that certain regions “saw signs that activity in some sectors was stabilizing at a low level”

President Obama also welcomed Cuba back into the global economy (to a limited degree) by lifting trade restrictions (telecommunications-related) and allowing increased travel and additional financial payments from Cuban-Americans to family members.

A hectic week on the economic calendar brought some mixed – and confusing – results, as usual. After a few stronger months of consumer activity, retailers struggled again in March as sales took a surprising tumble across most categories. Industrial production fell for the fifth straight month, revealing that manufacturers have a long way to go before declaring recovery.

On the other hand, while housing starts declined in March, the losses were attributed to apartment construction, and single-family residential activity was reported flat (similar to February); some optimistic analysts – like magazine publisher Waite – predicted the worst had ended for the housing sector.

Both the retail and wholesale inflation gauges dropped in March with the consumer price index (CPI) experiencing its first consecutive 12-month decline in prices since mid-1955.  While some pessimists in the bunch were quick to play the deflation card again, most seemed content to proclaim that price pressures are simply one aspect of the economy that warrants little to no worry in the present environment.

Weekly Economic Calendar

Source: Earnings Reports Will Play a Key Role This Week

The question, raised in a new Reuters piece, is certainly a good one – and a fair one.

As the United States suffers through perhaps its worst financial crisis ever – a crisis caused by the combination of rampant greed and some ill-conceived financial engineering – Wall Street’s reputation has been badly tarnished, perhaps forever.

Moving forward, two results will be a tightening of financial regulation and an increase in government control of the financial markets. We’ll also end up with a federal government that more closely controls – and in some cases owns stakes in – banks and other financial institutions, a move that some regard as de facto nationalization.

Like a super hero arriving to save the day, in steps Washington, “home to a popular president and a Congress whose mood matches that of a public angry at Wall Street for losing people’s retirement savings while doling out executive bonuses and raking in billions from taxpayer-funded bailouts,” Reuters writer Daniel Trotta wrote.

“I was in London with Mayor (Michael) Bloomberg in October and we were complaining to them about the action shifting to Washington and the executives in London said they were just as worried about it shifting to Brussels,” Kathryn Wylde, president of the pro-business non-profit Partnership for New York City, told the journalist. “Private financial markets have collapsed and the government is absolutely in charge.”

Thanks to the ongoing financial crisis, an off shift has been taking place. Wall Street, was once revered as a creator of profits that was ruled over by the so-called “Masters of the Universe.” But no more.

In December, the jobless rate moved to its highest level in 16 years – and that’s certain to get worse, if last week’s “Monday Massacre” of corporate layoffs is any indication. Correct or not, most Americans directly link those troubles on Main Street to the missteps made on Wall Street. And it certainly can’t help that we’re all reading stories of big bonuses still being paid out, even in the face of this downturn.

While these displays of greed continue to escalate even as the pain workaday Americans continue to feel, Washington has been working on a two-pronged fix-it strategy for the U.S. economy:

• Prong One is focused on bailouts, spending billions in an effort to stop the financial leaks that are threatening to sink the country into Great Depression II.
• Prong Two has the government focused on efforts to then jump-start the economy with a series of stimulus plans, whose price tags continue to escalate.

Initially, the general public was highly critical of these efforts, viewing them as wasteful.

But an interesting shift has subsequently taken place: Americans began to view the federal government as a kind of “savior of the last resort,” and became thankful for the efforts the lawmakers were making.

Americans even grew irritable when news organizations criticized those bailout and stimulus efforts. There was clearly a feeling that, while the bailout and stimulus maybe weren’t perfectly designed, at least Washington was trying to do something.

“There is a shifting of power and influence at the moment from Manhattan to Washington. The same thing happened during other financial crises in our history but most especially in the 1930s,” Kenneth T. Jackson, a Columbia University historian, told Reuters.

Market Matters

What recession?  While much of the world has been pointing fingers at Wall Street for the global financial crisis, the major investment firms took a break from begging for distribution of that next round of Troubled Assets Relief Program (TARP) money in time to dole out $18.4 billion dollars in employee bonuses in 2008.  President Barack Obama called the move “outrageous,” although Wall Streeters pointed out that the pay represents a 44% reduction from last year’s level (though it still stands as the sixth-highest bonus pool on record).

Meanwhile, while energy companies cried “doom and gloom” over plunging oil prices, Exxon-Mobil Corp. (XOM) announced a record annual profit of $45.2 billion – despite a 33% decline in 4th quarter earnings).  Not to be outdone, while poor retailers panicked over the lack of consumer activity, Amazon.com Inc. (AMZN) called its holiday season “the best ever” and surpassed most analysts’ earnings estimates.

An oversight panel deemed the TARP plan a failure, thus far, as many of the major recipients of government funds actually reduced their lending activities during the prior three months.

Newly confirmed U.S. Treasury Secretary Timothy Geithner claimed that TARP (Part 2) will be overhauled to ensure enhanced lending and even hinted at the creation of a “bad bank” that would purchase toxic assets from financial institutions. An $819 billion economic stimulus package passed the House without any Republican support and Obama turned to the U.S. Senate where certain provisions on lower taxes and family planning may prove more acceptable to the opposition.

However, as Money Morning reported last week, those “acceptable” additions are likely to push the price tag of the stimulus package up over $1 billion. President Obama is hoping to have a bill he can sign on his desk by the middle of next month.

Earnings season moved into high gear and Thomson Reuters Corp. (TRI) projected that Standard & Poor’s 500 Index companies suffered a 34% drop in profits (losses), the 6th straight quarterly decline.  In addition to Exxon-Mobil and Amazon.com, a few other companies reminded investors that not everyone is losing money: Verizon Communications Inc. (VZ), United States Steel Corp. (X), Procter & Gamble Corp. (PG), and Colgate-Palmolive Co. (CL).

Wells Fargo & Co. (WFC), Starbucks, Corp. (SBUX) and Ford Motor Co. (F) were among those posting dismal reports, though the No. 2 U.S. automaker says it has no plans to tap into government bailout funds.

Pfizer Inc. (PFE) set out to prove that deals can still get done in this environment and announced its intent to purchase rival U.S. drugmaker Wyeth (WYE) for $68 billion [For two related stories in today’s issue of Money Morning, check out this analysis of the Pfizer/Wyeth deal itself; or click here to read our evaluation on the outlook for the overall U.S. market for mergers and acquisitions].

Crude oil fell again last week and was hovering around the $42-a-barrel level as weak economic data (see below) and higher inventory reports revealed that demand was continuing to wane. Despite a recent four-day winning streak for the S&P 500 Index – its first since November – the major indexes ended January with losses again.

According to the so-called January Barometer, when the market tumbles in the first month, it typically slides for the remainder of the year.  Investors took their cues from the weak economic and earnings reports and offered a collective yawn to the House’s partisan passage of the stimulus package.  The “bad bank” idea seemed to generate a bit of optimism, though no real details about how such a plan would work have been announced.

Economically Speaking

Companies across virtually every sector of the economy continued to play “follow the leader” as additional layoffs were announced daily. Last Monday alone, more than 75,000 hit the unemployment line as Pfizer (8,000), Sprint Nextel Corp. (S) (8,000), Home Depot Inc. (HD) (7,000), General Motors Corp. (GM) (2,000), and Caterpillar Inc. (CAT) (7,500) were among those issuing pink slips.

The weekly initial jobless claims data confirmed that more people than ever (or at least since 1967, when the statistics first started being kept) are receiving unemployment benefits.  Meanwhile, the housing sector showed few real signs of rebounding as new home sales fell for the fifth consecutive month and dropped to their lowest level since 1982.  While existing home sales actually climbed in December by 6.5%, the median sales price plummeted more than 15% and now stands at its lowest level since 1968.

Still, the optimists point out that the mere fact some homeowners have emerged to buy houses at these distressed levels is a positive sign that a recovery is inching closer.  Unfortunately, investors weren’t buying it.

The domestic economy contracted at its fastest pace in almost 27 years as U.S. gross domestic product (GDP) plunged by 3.8% in the fourth quarter.  Again, the eternal optimists claim that most analysts were expecting a decline in excess of 5%, and said that the negative results should actually be perceived as positive for the economy.  (Unfortunately, investors weren’t buying that, either).

U.S. Federal Reserve Chief Ben S. Bernanke and his policymaking brethren repeated their pledge to keep rates at record low levels and hinted that they stand prepared to begin buying Treasuries and other fixed-income securities to spur lending activity. According to the central bank policymaking statement issued at the close of Thursday’s Federal Open Market Committee (FOMC) policymaking meeting, “conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.”

Weekly Economic Calendar

Source: Is Washington Replacing Wall Street as the City That Drives America?

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar