This from Investment U:

Media pundits keep reminding us how tough 2009 will be economically. Nevertheless, I predict this will be a good year for the stock market.

How can this be?

The stock market is a leading indicator. It generally falls before consumers and investors realize just how bad the economy is.

It also recovers long before economic activity picks up. Perversely, that means stocks often plummet during good economic times and rally during recessions… or worse.

In the January issue of The Oxford Club Communiqué, for example, I note that:

• In the 13-month recession in 1926-27, the market went up 41.1%.
• In the eight-month recession in 1945, it went up 19.5%. In the 11-month recession in 1948-49, it went up 15.2%.
• In the 10-month recession in 1953-54, the stock market went up 24.2%.
• In the 10-month recession of 1960-61, it went up 20.3%.
• In the 16-month recession in 1981-32, the market went up 14.6%.
• And so on.

The stock market doesn’t always rise during a recession, of course. And right now is particularly tricky because there is simply no precedent to today’s economic mess. We’ve never seen a real estate/mortgage crisis create a meltdown in the credit markets this way. Nor have we seen the Federal Reserve take such extreme measures to set things right.

However, investors can take some reassurance from one of the best – and most accurate – buy signals in the stock market. Here’s how it works…

20th Century Investing – Buying High-Yielding Stocks

Investors in the first half of the 20th century found that if you did nothing more than buy stocks when their yield exceeded the yield on Treasuries – and sell them when the yield on Treasuries exceeded the yield on stocks – you would have been in for every major rally and out for every major correction.

The returns were huge – and the system made sense. Stocks are riskier than bonds, market participants reasoned, so they should yield more to compensate for greater volatility and the likelihood of occasional losses.

The system worked like a charm until 1958. Then stopped cold. Stocks never yielded more than Treasuries for the next 50 years.

Public companies began using their cash flow to fund operations and acquisitions rather than paying out dividends to shareholders. With stock yields sharply lower, most analysts reasoned that the indicator was dead, that the yield on stocks would never again top bonds.

But after more than five decades, they have…

The S&P Yields More Than Treasuries For The First Time In 51 Years

Beginning on October 13, the 3.74% yield on the S&P 500 exceeded the yield on the 10-year Treasury for the first time since 1958.

If history is any guide, that means stocks are an excellent long-term buy and Treasuries – which have become a complete bubble (and table-pounding sell) in my estimation – are due for a long period of relative underperformance.

Don’t get me wrong. U.S. economic growth is likely to be negative over the next 12 months. But – shocking and surprising most investors – stocks should do well. And high-dividend paying stocks – especially those outside the troubled financial sector – may perform best of all.

One caveat, however. When focusing on yield, buy only healthy dividend-paying companies – those with rising sales and earnings – and reinvest those dividends for maximum total returns.

Source: The Best Stock Market Buy Signal In 51 Years

This from Taipan Daily

Which is better for playing the 2009 rally – small caps or large caps?

As a general rule of thumb, “small cap” stocks have a market cap of $1 billion or less. “Large caps,” in contrast, have market caps in the $10 billion range or higher… often much higher.

(Microsoft and GE, for example, have market caps in the neighborhood of $180 billion as of this writing. Exxon Mobil, the big dog on the block, is worth more than $400 billion.)

Small cap stocks have outperformed large caps for most of the decade, as you can see from the following chart.

From 2001 onward, the small cap stocks of the Russell 2000 Index trounced their S&P 500 peers in relative performance terms.

In 2006 the small cap outperformance trend peaked and stalled… came dramatically back on form in March of 2008… and then declined sharply again as markets fell apart.

Now let’s take a closer look at the same chart (daily view this time).

As you can see more clearly from the above chart, small caps peaked relative to large caps in September 2008.

This makes intuitive sense; as fear gripped the markets and panicked investors dumped shares left and right, the lesser known small cap names were hardest hit.

It appears, too, that the small cap exodus played itself out in late November/early December, as tensions eased and credit began to loosen somewhat.

In the context of what’s next for stocks, John Authers of the Financial Times points out that 2009 could wind up looking a bit like 1932.

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Get Ready for a Roller Coaster

In 1932 – the year FDR was elected President – stocks rallied 20% by early March. Then a vicious sell-off took the market to new lows… and then in July a new surge of optimism took hold, leading to 100%-plus gains in just two months. July 1932 wound up registering the all-time depression low.

So buckle your seatbelt, because there could be some wild trading days ahead.

I think, too, that if we do see a multi-month 2009 rally (or maybe even more than one), small caps could resume their outperformance trend. There are at least half a dozen reasons for this.

Small Cap Edge #1: Scrapping the $10 Rule.

Before the 2008 carnage, many institutional money managers had rules and restrictions on the books like “don’t buy stocks under $10” or “don’t buy stocks under XYZ market cap.”

Those rules made sense in more normal times, when there were plenty of higher-priced stocks to choose from. But now so many names have seen their share prices driven down to bargain-basement levels, the institutional $10 rule could be widely loosened if not scrapped.

On top of that, when animal spirits return to the markets – as they did with a vengeance in 1932 – there will also be a lot of temptation to scoop up the attractive large and mid-cap names that turned “small” by default.

Small Cap Edge #2: More Hidden Gems.

Truly great opportunities are often a result of market distortion. It requires a sustained period of sheer investor panic to create the kind of environment where $100 bills are left laying around on the sidewalk.

The investing equivalent of a $100 bill on the sidewalk is a company whose market cap is trading for less than its unrestricted cash in the bank, or whose lines of business and assets on the balance sheet represent eye-popping values in comparison to the discount Mr. Market has placed on the stock.

Simply by the nature of how Wall Street works, more of these “hidden gem” type opportunities are likely to be unearthed in the small cap arena. Diamonds in the rough don’t get market coverage from fifteen analysts and write-ups in USA Today – it’s much harder to find an edge in names that every mutual fund manager knows by heart.

For this reason, combined with what we just lived through, there could be more value to unlock in lesser known small caps.

Small Cap Edge #3: Survival of the Fittest.

The depths of the 2008 panic were so brutal that many of the weaker small cap players have been carried out. For those companies with too much leverage or precarious lines of business, the freezing of bank credit lines and sharp drop in commerce served as a death knell. This “culling of the herd” has left the 2009 crop of small cap survivors in stronger position.

(Remember, too, that small caps don’t get bailed out by the Treasury or the Fed. You have to be “too big to fail” to enjoy that dubious privilege.)

Small Cap Edge #4: A Crisis at the Top.

Whereas small caps were subject to the Darwinian hand of free markets, many large cap players (particularly in the financials) were bailed out. When Treasury Secretary Hank Paulson spoke of sweeping financial crisis, he was actually talking about the screw-ups of the biggest (and supposedly more sophisticated) players.

The injection of government funds in an effort to save jobs – and to spare the weaker of the “too big to fail” names from a harsh free market verdict – will not do much to enhance future competitiveness on the large cap side.

As Jim Grant points out, the large cap institutions who wake up in bed with the government may find that Uncle Sam has cramped their style, and thus their profit potential, for a long time to come. This could create an opening for scrappy small caps.

Small Cap Edge #5: More Diversity/Less Consumer Exposure.

Many of the large cap behemoths in the S&P 500 got that way by leveraging their exposure to the eighth wonder of the world: the all-singing, all-dancing, all-spending American consumer. For the better part of a quarter century, relying on the consumer to fuel growth was a great play. Not anymore.

Plenty of investors now lick their chops over depressed large cap values in the consumer-linked space, assuming that it’s only a matter of time before the future again resembles the past. But what if the past is gone for good? What if the “structural impairment” of baby boomer wallets is permanent, or at least long-lasting enough to keep the U.S. consumption glory days from ever returning?

If the world has indeed changed, and if adaptability and diversity are better strategies than big consumer-linked playbooks put together over the past quarter century, that reality could again favor the more nimble and diverse world of small caps.

Small Cap Edge #6: Gravity.

If a high-performance motorcycle (a.k.a. “crotch rocket”) and a supercharged Range Rover race each other off the line, who wins?

That’s easy – one is 2.8 tons of luxurious bulk. The other is basically an engine strapped to a wheel.

Small caps tend to outperform large caps in periods of expansion for a simple reason: it’s easier to blow the doors off performance-wise when you’re small and light. The more a company bulks up, the harder it becomes to “move the needle” in terms of profit growth.

Small caps could also be the benefactor of aggressive optimism in 2009. If the feeling takes hold that the war on deflation has been won – and just as importantly, that the banks are beginning to lend again – both those factors could act like a turbo-kicker for the “crotch rockets” of the investment world.

In conclusion: if you’re looking for long-term investment opportunities, there are bargains of the decade to be had in overlooked small caps now.

And if you’re ready to ride the 2009 roller coaster for big trading profits, small could still be the way to go.

Source: Six Reasons Why Small Caps Could Lead the 2009 Rally

More from David at The Sovereign Society:

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

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

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

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

The Secret of “Guaranteed Dividends”

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

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

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

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

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

Here’s an example…

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

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

Well that’s the power of Reverse Convertible Notes.

Here’s another great example:

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

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

The Disclaimer

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

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

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

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

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

This from Today’s Financial News:

You have to search the equities market pretty hard to find any companies still trading at overvalued prices, but if you look hard enough they are still out there.

One of them is making headlines today. Thanks to the company’s better-than-expected earnings report, shares of Under Armour (NYSE:UA) are trading significantly higher.

Right now, buyers are paying a 12% premium on yesterday’s closing price. Share price was even higher earlier in the day. Buyers are making a big mistake.

Out of all the undervalued gems on Wall Street right now, I cannot imagine why in the world investors are willing to shell out a sizeable premium for this already overpriced stock.

It doesn’t add up

Just look at the earnings figures released today. Over the last three months, Under Armour recorded revenues of $231.9 million, a year-over-year increase of 24%.

Get rid of manufacturing expenses, taxes, and all that other stuff and the company reported a quarterly profit of $27.5 million, or $0.51 per share. Analysts were expecting revenues of $227 million and earnings per share of $0.50.

Sure, the company exceeded forecasts, but not by the margins you would expect to see when investors bid share price up by double-digit proportions.

Because of today’s valuation surge, Under Armour now has a market capitalization of over $1 billion and a price-to-earnings ratio of over 24. That figures is nearly twice as high as the S&P 500 average.

With the company lowering its annual revenue forecasts to $750 million from as much as $775 million, its P/E ratio should be dropping, not rising.

Do not fall for marketing hype

This stock is a prime example of emotional investing and a marketing team’s effect on investors. Share price is artificially propped higher because investors believe the company truly has a long-lasting, high-demand product. But in reality, Under Armour has a terribly weak business model.

Its competitive moat is tiny, which is made obvious by the huge amount of comparable alternative products flooding the market. Plus, the company is right in the middle of an industry highly susceptible to recessionary pressures.

Let’s face it. The first thing consumers will cut out of their budget over the next few months will be trendy, over-priced underwear. If Under Armour wants to keep its products moving off of store shelves, it will be forced to greatly reduce prices. That means margins will be significantly reduced and earnings will be hammered.

My head is spinning watching investors waste their money in this stock. There are much, much better choices. The only investors that will make money on this company are the ones that are smart enough to short it.

Under Armour should be one of the worst performing companies, not one of the top performers. It is as simple as that.

Source: Marketing hype: Watch out for Under Armour (UA)

And these are only the reported job losses, and I’ve even seen estimates as high as 400,000 jobs lost!

And people with houses to sell are not going to be too happy, either, as Bill Bonner here at The Daily Reckoning reports, “So far, U.S. homeowners have lost probably about 12% of the wealth they thought they had in their houses. The total capital value of the residential housing market is about $20 trillion. So, a 12% loss is equal to about $2.4 trillion.”

Apparently, Mr. Bonner recognizes the look of horror on my face and the way I am gasping for breath at the prospect of a country with a GDP of $15 trillion losing $2.4 trillion in wealth. To make me feel better, perhaps, he added, “A few foreign housing markets have been hit harder – Ireland, Spain and Iceland, for example.” Yikes!

Back here in America, the National Association of REALTORS reports, “the median price of an existing single-family home dropped 8.7 percent in February from a year earlier, the most in four decades of record keeping.”

And it is not just first mortgages that are in trouble, as Ed Steer of GATA sent the International Herald Tribune article “U.S. Equity Loans Are Next Round In Credit Crisis”, which contains the chilling statistic “Americans owe a staggering $1.1 trillion on home equity loans – and banks are increasingly worried they may not get some of that money back.”

And they should worry, as, “In December, 5.7 percent of home equity lines of credit were delinquent or in default, up from 4.5 percent in 2006, according to Moody’s Economy.com”, and “In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid.”

To make sure that they get their money back, “many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first.” What makes this all the more worrisome is that “In the past, when home prices were not falling, lenders did not resort to these measures.” Cue ominous soundtrack, with wolves howling and banshees wailing.

And it won’t be happy for those guys holding stocks of the S&P500, as that index had earnings sliding again, this time to $66.18. In case you were wondering, less than 6 months ago, the earnings of the S&P500 were almost $86.00! It’s amazing that the stock market HASN’T collapsed in the face of an earnings slowdown of 23%!! Earnings are slashed by almost a quarter, but the underlying stocks haven’t sold off, but actually seem to rise? Wow!

This amazing phenomenon proves either that the government’s Plunge Protection Team exists and is massively operating to intervene in the markets, or that people are truly idiots. Or maybe delightful little fairies guard our dreams and protect us in life! Something.

Either way, the earnings yield of the S&P500 is a miniscule 4.83%, which is the lowest since sometime in ’04. Nice “growth” there, dudes!

And it won’t be happy for many shareholders at all, as Jack Willoughby in Barron’s reports, “The average U.S. diversified stock fund lost 10.11% in the opening quarter, slightly more than the Standard and Poor’s 500 index’s drop of 9.44% over the same span.”

It also looks like all the other stock funds, (big cap, low cap, high growth, blue chip) had losses, too, ranging 7% to 15% in the first quarter, with the exception of everybody’s favorite, the gold funds, which gained 5.22%, and some short funds that were up 11.93%.

And the news is not any better in bonds, and Ty Andros of TraderView.com has been looking at the gigantic bubble in bonds. He says that bond prices “have been this high, and rates this low, ONLY one other time in over 50 years, and that was the 2nd quarter 2003.”

Wow! 50 years! Then, since he knows what a drudge I am about inflation, innocently asks, “How about purchasing power? Let’s use the rule of 72 to figure out what type of purchasing power losses these holders are about to face. 72 divided by inflation of (I will be kind) 9 percent.”

The results are that, “In the case of the 10-year note, it will lose half its value over the next 8 years, and in terms of the 5-year, a 31% loss of purchasing power will be seen between now and redemption time.” My God! These are staggering losses, considering the sheer tonnage of bonds that are already extant in the freaking world!

And why will bond investors face purchasing power losses? Easy! Mr. Andros says, “MZM (money with zero maturity) is expanding at 30 percent, and reconstructed M3 is running at over a 17% growth rate.” I am stunned! In short, the Federal Reserve is creating money seemingly as fast as it possibly can, which devalues all the existing currency by just that little bit more!

On the other hand, he says, “As long as they create fiat currency and credit as they are, stocks can NEVER be expected to decline for long. They will just rise to reflect their re-pricing in the currency in which they are denominated (currencies don’t float they just decline at different rates) with nominal gains to reflect the loss of purchasing power, not to be confused with REAL gains as measured in gold.”

And to prove it, look at Zimbabwe, where a single cigarette now costs over Zim$750,000; their stock market shows the biggest gains of all the stock markets in the world!

Too bad the entire capitalization of the Zimbabwe stock market is roughly equal to a used Chevrolet with bald tires! Ugh.

Until next week,

The Mogambo Guru
for The Daily Reckoning

The Mogambo Sez: If I was ever a bull on gold, silver and oil, I was but a novice, as I am much, much more so now.

And so should you be.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s , The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page .

Dow Jones MarketWatch reports that S&P 500 futures fell 6.5 points to 1,353.80 and Nasdaq 100 futures dropped 8.25 points to 1,829.00, while Dow industrial futures fell 52 points.

Yesterday, the Dow Jones Industrial Average shed 49 points, the Nasdaq Composite lost 26 points and the S&P 500 fell 11 points.

Meanwhile, oil futures were up 96 cents to $111.83 a barrel and corn futures rose 1% to $6.11 per bushel.

“How do we square the strong rallies we’re seeing in oil, gold, grains and basic materials with forecasts some are making for a global recession?” asks Black Bear.

“Answer: Somebody is obviously wrong. You can’t have demand and prices soaring at the same time that a global recession is taking place. Our solution is to follow the money — and bet on commodities. We think the next tidal wave of wealth pouring into commodities could be a real doozy.”