This from Rude Awakening:

Welcome to “The Great Suppression.” The government keeps trying everything it can to suppress the unfolding economic bust. Whether the Great Suppression succeeds or not is beside the point. What concerns us is that its actions will have consequences in the marketplace. And as investors and speculators, we have to think about what those might be.

It’s sometimes uncanny how history repeats itself. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.” If FDR walked the Earth again, Obama’s stimulus would look familiar.

Over the weekend, we got more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least 2 million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

Our infrastructure stocks have been among our best performers over the past year.

Insituform Technologies (Nasdaq:INSU), for instance, continues to announce new contract wins. (See Rude Awakening from July 23, 2007 – Pipe Down!) The company repairs water and sewer pipes with a trenchless technology that does not require you to dig up the pipes. We’re up about 37% on that, a welcome spot of green in what has otherwise been a tough row.

Ameron Intl. (NYSE:AMN) is another infrastructure play. It has a water pipe business, which ought to benefit from the slew of water projects. Scott Black, of Barron’s Roundtable, had Ameron as one of his stock picks for the year. “In Arizona, Nevada and California, a lot of shovel-ready water projects are waiting for a go-ahead,” Black said.

“Ameron makes wind towers, too, and infrastructure products. It owns 50% of Tamco, which makes steel rebar for highways, bridges and overpasses.”

He also pointed out Ameron’s good backlog. “For each $100 million incremental increase in revenue under an infrastructure bill, based on 22% margins, they’d make $15.3 million after taxes,” he says. “Ameron… is cheap based on both tangible book value and expected earnings. It’s an interesting way to play a pickup in infrastructure in California and the West.”

Others in our portfolio that may see some increase in business thanks to the swell of money from Obama’s bill include Gorman-Rupp (AMEX:GRC). I updated this one in your last issue. GRC makes a variety of pumps. It has exposure to a number of markets affected by the stimulus plan, including municipal water and wastewater systems.

I like Gorman-Rupp for a lot of reasons, as I outlined in the issue. Chief among them is a rock-solid balance sheet — excess cash and no debt — and a good long-term track record. While not stone-cold cheap at 16 times earnings, it’s not a bad price to pay for an unlevered business earning a steady (and resilient) 16% return on capital with good growth opportunities in front of it.

Viterra (TSE:VT), as I mentioned in this column last week (”Investing in Food“), is another very compelling investment. The company, which operates in various aspects of the Canadian grain handling and agribusiness, posted very impressive numbers in the fourth quarter.

In a year which most would rather forget, Viterra’s business shined. For the year, it booked $1.31 in earnings, up 56% from a year ago, thanks to closing the (brilliant) acquisition of Agricore. At today’s price of $9.25, Viterra trades for only 7 times earnings. You’re not going to find many companies putting up those numbers available at 7 times earnings — and Viterra is financially strong.

Viterra generated $400 million in free cash flow in 2008. That on a market cap of just over $2 billion, for a 20% free cash flow yield. There is a lot of room for error when you buy stocks at those kinds of valuations. And the outlook here is still bright if you believe agriculture markets will be strong, as I do.

In today’s Financial Times, there was a story on a new report from the London-based think tank Chatham House. As the FT reports: “The world faces ‘the real risk of a food crunch’ if government does not take immediate action to address the agricultural impact of climate change and water scarcity… ‘Food prices are poised to rise again.’”

This is something I’ve been writing about here and in C&C. I think we’re looking at a strong back half of the year for grain prices as global grain stocks fall. That will be good for a lot of our ag-related names, including Viterra, but also for our irrigation play Lindsay Corp. (NYSE:LNN). (See Rude Awakening from July 4, 2007, “The Most Dangerous Religion.”) The latter is another nice pickup here, with no net debt and trading for less than 10 times earnings.

Irrigation and fertilizers play a big role in boosting yields and producing more food. Viterra, a sort of toll road on grain traffic, also benefits. For now, these stocks look cheap. But the market won’t be able to ignore the numbers as we roll through 2009. Good results and rising grain prices will attract attention.

Already, wheat, corn and soybeans are up 15%, 17% and 22%, respectively, since December. As the FT notes: “In contrast with other raw materials such as oil or aluminum, which have plunged back to the levels of 2002-2005, agricultural commodities are trading higher than they were 12-18 months ago.”

As I write, the S&P 500 is down about 8% in the month of January. Barring a rally, we’re on pace for the worst January on record for the S&P 500 since 1970, when the S&P fell 7.7%. I pass this onto you so you appreciate the historic nature of this market we are in. It’s been difficult to show any gains investing on the long side.

But when you invest in good names with valuable assets and quality businesses, their stock prices will – eventually – reflect the good things going on under the hood.

Source: The Great Suppression

It’s time to make a big bet and begin investing in China.

I know. It’s not exactly a popular stance. And the smart money is doing exactly the opposite. Or so it appears…

Yesterday, the Royal Bank of Scotland hit up the China ATM for a $2.37 billion withdrawal. It sold its entire 4.3% stake in Bank of China. And a week ago, Bank of America cashed out part of its stake in China Construction Bank Corp. for an estimated $2.83 billion.

Making matters worse, the MSCI China Index lost a record 53% last year. It’s counter-intuitive and near impossible to rationalize adding money to a losing investment…

Investing In China – 11 Reasons Why It’s Time

Here are 11 reasons why investing in China is exactly what we should do:

1. The truly “smart money” is buying, not selling. To be fair, the reason Bank of America “took a little money off the table,” according to spokesman Bob Stickler, is because of its own financial condition and need to raise cash. Same goes for the Royal Bank of Scotland. Yet, looking past these institutions, the truly smart money is loading up on China. Mark Mobius, the king of emerging markets, sums it up best, “We’re having a wonderful time buying tremendous bargains.” Stats from research firm EPFR indicate the rest of the smart money is following suit. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995. We should, too.
2. Chinese stocks are cheap. Ridiculously so. If legendary investors like Warren Buffett salivated over U.S. stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings.
3. Share prices are contracting, but earnings keep growing. Based on the severity of the sell off, you’d think every Chinese company was unprofitable and headed for bankruptcy. Yet the fundamentals remain rock solid. The average Chinese company is still growing earnings by 30%, according to a recent report in China Securities Journal. Compare that to the estimated 12% earnings decline in the fourth quarter for the companies in the S&P 500, and the bargain valuations make even less sense.
4. Chinese investors learned a tough, but necessary, lesson. During the height of China’s economic boom, retail investors viewed the stock market as an ATM. They lined up by the millions to open brokerage accounts. But much like our infamous dot-com bubble, Chinese day traders and novice investors got a very painful reminder of what happens when the “Greater Fool Theory” reaches the last idiot. The important thing, however, is that the correction served a higher purpose. It began the process of flushing the extreme irrationality from the market. So we can be certain the next leg up will be governed by fundamentals, not hype.
5. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, we can cross one big inflation risk off the list.
6. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in the United States, such a rate is downright explosive.
7. Massive foreign reserves. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
8. Personal savings. Unlike Americans that spend more than they earn, the Chinese save an amazing 35 cents on every dollar. This provides yet another cushion against any slowdowns. But also an enormous opportunity for future growth. As China’s economy develops, and affordable insurance and health care become ubiquitous, expect the Chinese to get comfortable spending more of their hard earned cash.
9. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity – 70% of GDP in the United States is attributed to consumer spending – the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer.
10. Forget what Westerners think, locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago. If they overwhelmingly see good things on the horizon, we should believe them.
11. The “mother of all stimulus plans.” While the massive government stimulus package has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. As a fund manager for BlackRock notes, China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.

Investing in China: 6 Ways to Play It

Make no mistake. The shooting fish in the barrel stage of investing in China is long over. Simply buying the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) won’t cut it anymore. It’s too obvious.

So how do we play the next bull charge in China?

Well, last week, I offered up one compelling small-cap Chinese play, E-House Holdings (NYSE:EJ). I’d stick to that theme – small caps, with the strongest growth profiles. And that puts China Security & Surveillance (NYSE:CSR), a leading provider of digital surveillance technology, and A-Power Energy Generation Systems (Nasdaq:APWR), a power equipment company, at the top of my list.

For those with a more conservative bent, I’d stick to large-cap, blue chip, best-of-breed China stocks. Ones like China Mobile Ltd. (NYSE:CML), the world’s largest phone company. It sports a sold balance sheet, increasing profitability and a temporarily cheap valuation.

Whatever you do, don’t wait too long. The Chinese New Year holiday gets underway January 25. When it’s over, don’t be surprised if the Chinese markets start fresh and get back to their winning ways.

And I say that because the strong economic underpinnings, which lined investors’ pockets with gold from 2004 to 2007, remain well intact. Whether the next leg up will produce the same 450%-plus returns remains to be seen. But rest assured, the catalysts are in place to make it possible.

Source: Investing in China: 11 Reasons Why & 6 Ways to Buy

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

This from Penny Sleuth:

Here in the United States, the household savings rate has stayed below 2.5% since 1999, according to our friends over at The Economist. Instead of stashing our money in savings accounts, we spent with reckless abandon and used our homes as savings, borrowing against their ever-increasing value whenever cash was needed.

But now that the stink has hit the fan, the once unstoppable American spender is doing something quite curious: playing it safe with his money. And he’s certainly not buying stocks. One look at the crashing yield curve says it all. No-interest 90-day T-bills are flying off the shelves…

Of course, the same folks who are buying Treasuries and stuffing money under mattresses right now are the ones who were telling us house prices would never go down and subprime was nothing to worry about. Looking back even further, these were the same people frantically buying stock back in late 1999, when the global price-to-earnings was 35.

The Economist writes that when American P/E ratios are low, returns on equities over the next 10 years average 8%. And when they are high, returns average 3%. You can’t argue with those numbers. The time to consider stocks best is while everyone else’s back is turned. We’re looking at a global P/E near 10 right now…opportunity awaits.

Follow the Crowd and You’ll Miss Great Opportunities…

For every brilliant idea, there’s someone waiting to call it a blunder. Many people consider the light bulb to be one of the most important scientific innovations of the last hundred years.

But this wasn’t always the case. To some of the greatest scientific minds of the late 19th century, Thomas Edison’s light bulb was a foolish toy…

“[The light bulb is] good enough for our transatlantic friends… but unworthy of the attention of practical or scientific men,” decided the British parliamentary committee in 1878.

In 1880, Henry Morton, president of the Stevens Institute of Technology, claimed “Everyone acquainted with [the light bulb] will recognize it as a conspicuous failure.”

Looking back now, we see these critics as fools. The light bulb became the founding invention of Edison’s small business venture — a company we know as General Electric. As gratifying as Edison’s victory was personally, the financial windfall for Edison and his early investors, including J.P. Morgan and the Vanderbilt family, helped create some of the greatest fortunes in history.

Are there more brilliant inventions out there for the taking right now? You’d better believe it…

Source: Low P/E Ratios Spell Opportunity as Investors Flee to T-Bills

More from Money Morning:

A properly structured and globally diversified portfolio using the 50-40-10 allocation model (50% “base-builder” foundation investments, 40% global growth and income plays and 10% “rocket rider” speculative investments that will perform well in a recovery) we recommend in The Money Map Report – our affiliated monthly investing newsletter – will prove to be an investor’s best friend. And the reasons for that are as simple as they are compelling:

• First, a properly structured portfolio has built in safety brakes that keep us from making overly risky decisions.
• And second, while this allocation model was constructed to minimize our downside in markets such as the one we’re navigating right now, it also positions us to benefit when the rebound eventually gets under way.

During the past year, we’ve repeatedly urged our readers to make sure two other elements are part of their portfolio: Dividend-paying stocks and specialized “inverse funds” that gain when the markets decline.

While dividends are important in any market, they’re downright crucial now because they add to returns during market rallies and help offset losses during market declines. And our commitment to inverse funds was rewarded during the whipsaw month of October: During a month in which the Standard & Poor’s 500 Index lost 16.8%, the Nasdaq Composite Index shed 16.3% and the Dow Jones Industrial Average dropped 13.9%, all 10 of the best-performing exchange-traded funds (ETFs) were inverse funds, which boasted one-month returns ranging from 36.4% to 66.6%, Thestreet.com reported last week.

Now those are admittedly highly remarkable returns – and clearly aren’t the norm. But it does demonstrate the point we’ve been making: It pays to protect y our downside even as you position yourself for gains. And not only do such investments as inverse funds hedge our downside, they smooth out our overall portfolio volatility and help calm roiled waters.

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

Stores like Whole Foods (NASDAQ:WFMI) and Trader Joes are watching their customers head to low-cost competitors like Wal-Mart (NYSE:WMT) and Safeway (NYSE:SWY).

It is no surprise to see an ultra-cheap retailer like 99 Cents Only Stores (NYSE:NDN) climb its way to the sole spot on the list of companies reaching 52-week highs today. The global economic crisis has actually been the best thing to happen to the company’s share price in a long time.

The rationale behind the positive run is obvious. When the economy is in the gutter, consumers have less money to spend on the things they need. So they go to the cheapest retailer they can find.

A wino’s delight

When we need a toothbrush, why spend $4.99 on a fancy name-brand brush when you can get one for less than a buck?

Or how about cleaning supplies? Or stationary? 99 Cents Only even sells bottles of wine at its namesake prices.

Of course, 99 Cents Only is not the only ultra-cheap retailer doing well these days. Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) are both multi-billion dollar companies making their investors money over the past few months.

While these companies may appear as an oasis in a desert of losses, investors need to use caution. All three stocks have gotten a lot of attention lately and are becoming overpriced.

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What if they’re right?

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For example, after more than doubling its share price since July, 99 Cents Only has a price-to-forecasted-earnings ratio of over 30. If the next earnings report misses expectations by only a small margin, shareholders could be in for a sizeable drop.

Granted, sales have increased over the past three months and are likely to surge even higher during this quarter, but the competition is catching up. Traditional retailers, which are often slow to react to economic waves, are finally making moves to target consumers during a recession.

Eye-catching sales and incentives are drawing cash-conscious consumers back into retail stores. Beyond that, ultra-discounters do not offer all the products consumers require. They will still head to the more-expensive “big box” stores for their needs.

Consumers are changing their habits, leading savvy investors to follow. Track the trends and invest appropriately and you could be one of the traders celebrating a 52-week high today.

Source: Cheap date: 99 Cents Only Store (NYSE:NDN) hits 52-week high

This from The Rude Awakening:

This financial meltdown is mauling almost every asset class. Stocks are trashed. Corporate bonds are a wreck. Emerging markets are crushed. Energy prices are tumbling. Commodities generally are in the dumps. Safe havens? Get outta here!…Even gold is trending lower. There has been nowhere to hide…except T-bills.

But there is a ray of sunshine; stocks have not been this cheap in more than twenty years…and many stocks are as cheap as anything you could have found at the market lows of 1974. No, we don’t think your should borrow a massive amount of money to invest, hoping for a quick turnaround. But it is time to cautiously look at the opportunities the market presents…

Often, it is the small companies that lead the charge toward market recovery. Just take a look at what some of the market specialists are saying:

“When you look back over the last 10 recessionary environments, what tends to lead back on the upside is small-cap equities.”

— William Greiner, Chief Investment Officer of UMB Asset Management

“Like springtime crocuses, small-cap stocks flourish once the harsh cold of a bear market is over… Because small-caps are undervalued once the market turns around, they benefit disproportionately from an earnings recovery.”

— Larry Light, Wall Street Journal

Now, who knows when the bear market will end, or when the stock market will find a bottom? After the Dow’s 1,000-point rebound on October 13, we all hoped the worst was over. That rebound, however, proved to be nothing but a tease. Over the following weeks, the Dow proceeded to give back every one of those 1,000 points. Then stocks rocketed higher again…and then tumbled again.

Despite these 1,000-point gyrations, the Dow has managed to crawl almost 9% above its bear market low of 8,175. Unfortunately, the beleaguered index would need to gain another 60% to return to its all-time high! So that gives you some idea how far the mighty have fallen. And many of the less-mighty – the small cap stocks – have fallen even farther. But this is where our sad story takes a turn for the better: A lot of very fine stocks are wearing deeply discounted price tags.

Just look at a stock like Neenah Paper (NYSE:NP), a small-cap paper manufacturer that saw its share price slide 80% despite very solid fundamentals. Or look at stocks like chip-maker Silicom Ltd. (NASDAQ:SILC) or chemical manufacturer Buckeye Technologies (NYSE:BKI), both of which have solid fundamentals and P/Es under 7.

Even though the markets have been anything but kind to investors lately, a few courageous (and historically successful) investors are making a good case for buying up some undervalued stocks right now.

Warren Buffett, who has never claimed the ability to predict short-term stock market action, is one of the investors who is beginning to make some purchases. “A simple rule dictates my buying,” the Oracle of Omaha explains, “Be fearful when others are greedy, and be greedy when others are fearful.”

We agree…and we think it’s time to get greedy…at least a little greedy.

Source: Betting on Gambling

1.) They’re Riskier Than Other Investments

While this was once true, if you’ve been following the economy recently, you know that’s no longer the case. In an age when blue chips like AIG (NYSE:AIG) or Lehman Brothers can swing just as wildly as the crankiest penny stock, even the big names are no sure thing.

To be fair, penny stocks are far from risk-free. But it’s that risk that brings with it the reward potential penny stocks are known for.

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The “Black Market” Secret Used by Famous Investors

Even world-famous investors first cut their teeth in the investing world by raiding “Black Market” stocks like these…

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2.) They’re Hard to Buy

Just in case this myth wasn’t busted when I wrote Taming the Wild West of the Market back in May, I’m back to reiterate.

Buying penny stocks isn’t necessarily any harder than buying another type of investment. You just place a trade with your broker, or purchase the shares through an online brokerage account, and watch the magic happen. Your broker might have a different commission structure for penny stocks, so as always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

3.) You Have to Be An Insider to Make Money with Penny Stocks

Believe it or not, being an insider doesn’t garner you much of an advantage as a penny stock investor. That’s because Wall Street is way to preoccupied with more expensive stocks to give penny stocks a second thought.

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“Tier Two Equities” That Can Pay Five and Six Times More Than Regular Stocks…

For years, professional investors have quietly used “tier two equities” to lock into America’s best blue chips at a discount…for much bigger gains…even during crashing markets…well, now it’s your turn to cash in…

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4.) OTC Stocks Aren’t as Legitimate as Blue Chips

Don’t think that just because a stock isn’t traded on a major exchange like NYSE or NASDAQ that the company is somehow defective.

In fact, the opposite can sometimes be true. Exchanges like NYSE have burdensome listing fees and requirements that preclude smaller companies from getting listed. Some of the most compelling investment stories were those of small companies listed on over-the-counter services like OTCBB or Pink Sheets.

And don’t think that OTC stocks are any more prone to fraud than listed companies are. Stocks listed on services like OTCBB and OTCQX have heightened listing and disclosure requirements over the past decade to help keep things transparent for investors.

5.) There’s No Place for Penny Stocks in My Portfolio

If you think that penny stocks don’t belong in your portfolio, maybe you should take a second glance at what your investment objectives are. While penny stocks have traditionally been riskier choices than their listed counterparts, today’s stock market is bringing that precept into question.

Most portfolios have at least some room for higher-risk/higher-reward investments like penny stocks. That’s especially true if investing in penny stocks doesn’t impinge on your retirement money.

Source: The Top Five Myths About Penny Stocks

This from The Daily Reckoning:

Obama is lucky he wasn’t elected a year ago. At least now it is clear that he’s innocent. He comes to the office facing problems not of his own making. Instead, they were made by his predecessors – notably, Alan Greenspan and George W. Bush. Working together, the two bumblers squandered America’s fortune, drove off her industry, and put just about everyone deeper in debt than ever in history. Did two more hapless, more incompetent, more conniving half-wits ever before conspire to create such a mess?

Alan Greenspan courted power and fame. He got both. But you can’t get power and fame without being a jackass. At least, that’s our conclusion after reviewing the history of the United States of America. Just look at the presidents who got power and fame: Abraham Lincoln… Woodrow Wilson… Franklin Delano Roosevelt. The first two got the US into unnecessary and disastrous wars… the last one got the US into an unnecessary and disastrous depression.

Okay… okay… it wasn’t entirely their fault… but it’s our Daily Reckoning, we can exaggerate if we want to…

Alan Greenspan would have been much less popular had he put the brakes on the dot.com bubble in ’97… and the brakes on the housing bubble in 2005. Of course, he probably would have lost his job sooner. But the US would have a much healthier economy as a result.

And talk about unnecessary wars! And unnecessary depressions! George W. Bush has brought us both! No president ever presided over such a spectacular turnaround in America’s fortunes:

…from a fake budget surplus of nearly $300 billion under the Clinton administration, Bush will leave office with a real deficit approaching $1 trillion…

…coming into Washington at the peak of the bubble of 2000… he’ll blow out of town leaving behind an economy in its worst slump since the ‘30s…

…after taking control of the spiffiest, most widely respected country in human history, in 2000, he leaves a country that is widely regarded as broken down… (Russian president Medvedev recently charged the US with causing the world’s financial meltdown… the French believe US-style capitalism is collapsing, like the Soviet Union in ’89… the Latinos now mock the idea of taking financial advice from the US)

…after coming into office lauding the virtues of humble foreign policy and proud capitalism, the US has taken up a breathtaking combination of bombastic military intervention abroad and abject, swinish collectivism at home.

But let’s get back to Obama. Seems like a decent fellow, as near as we can tell. But he has a great temptation to become a jackass.

Obama is beginning to realize what he’s up against. This is no ordinary cyclical downturn. Typically, a slump brings interest rates down. (Usually accompanied by central bank rate cuts.) Cheaper borrowing arouses business and speculative activity… which, in turn, tends to get the economy moving again.

This time, that’s not happening. The authorities are handing out money below the inflation rate and practically begging banks to lend…

But who wants to lend when there’s a danger you might not get your money back? And who wants to borrow when everyone is desperate to get out of debt?

Today’s Financial Times announces that another 70,000 jobs could be lost on Wall Street. Who needs so many employees when no one’s doing any deals? No one’s borrowing… no one’s lending… investors are running scared… and private equity is curled up in a cave somewhere…

Why? Because it’s a ‘balance sheet recession,’ not a regular, cyclical downturn. People have lost a lot of money… and they’re afraid of losing more. So businesses are cutting back as fast as they can. The job losses aren’t limited to Wall Street. Today’s news from Associated Press tells us that there are 10 million people out of work – the most in 25 years. The New York Times says unemployment is at a 14-year high. (We didn’t study the figures to see how they differ; but we predict that the figures in the last quarter of this year will be even more alarming…)

Everywhere, investment portfolios are being trimmed… cash is more than king; it has become a demi-god. This despite the fact that there are some great investment bargains around.

After “Black October,” says the FT, it’s the “buying opportunity of a lifetime.”

Stocks were overpriced for the last 20 years. Now, they’re not so overpriced. In fact, by almost any measure you use, they’re fairly reasonable. Compared to the yield you get from Treasury bonds, for example – a popular method of gauging the stock market – stocks look like a good deal. P/E ratios, too, are in the ‘normal’ range. Or, you can look at James Tobin’s “q ratio” – comparing stock prices to business net worth. Here again, stock prices don’t look out-of-the-ordinary.

But a ‘balance sheet recession’ is an unforgiving, mean, and tenacious rascal. After such big losses, businesses, consumers, investors, and banks need to rebuild their balance sheets – by paying off, defaulting on, or working out their debt. And then they need to rebuild their confidence… with rising asset prices and a growing economy. All that takes years… many years.

Worse, a balance sheet recession is like a straightjacket; the harder you fight against it, the tighter it gets. When government tries to prevent assets from being marked to market, for example, it delays and obstructs the process of adjustment. Rather than let the debts and mistakes be flushed out, they remain on balance sheets… blocking progress, frustrating change.

“Change is Nature’s delight,” said Marcus Aurelius. Trying to stop change – at least in a balance sheet recession – is Nature’s horror. Balance sheets need to be corrected. Until they are corrected future growth can’t happen. So, the whole system is stymied, clogged, stopped up, constipated…. like the US economy in the ‘30s… or like Japan’s economy in the ’90s…

Source: No ordinary slump

More from Investment U:

Did you know that you could get paid to buy stocks at the price you want? That’s right, someone will actually hand you cash today for your promise to buy any stock you want at a cheaper price than where it’s currently trading.

All you have to do is decide which stock you want to buy, at what price you want to buy it, place the trade and collect your money.

Is this for real? Is this a joke? Is this legit?

This is absolutely for real, it’s absolutely not a joke and it is extremely legitimate. When was the last time someone gave you a wad of cash just for buying your favorite stock at rock-bottom prices? I’m guessing probably never, unless you’ve been using this very simple and safe strategy. I personally use it all the time, and many others “in the know” have been using as well.

Being a profesional options trader for the last 17 years, I’ve figured out exactly which options strategies are best to use at various times in different market environments. But one strategy can be used at almost any time…

It’s called “put option selling” and it’s a great way to get your hands on instant cash while at the same time giving yourself an opportunity to buy your favorite stock at a price much lower than where it’s currently trading.

Many people have never heard of, let alone used, this option strategy, but in my book there’s no better way to spend your time and effort while you wait for your stock to come down in price. I’m going to show you how you can use it to start collecting some of that cash that’s being handed out.

Being Paid to Wait With Put Option Selling

What do you usually do when there’s a stock you want to buy but it’s too expensive? I’ll bet in most cases, you enter into a limit-buy order for that stock using a price that’s lower than where it’s trading.

That’s how 95% of investors do it, so don’t feel bad.

But what are you doing in the meantime, while you’re waiting for the stock to drop in price? I’ll bet you’re just sitting there twiddling your thumbs and wasting valuable time. Has anyone given you cold, hard cash while you sit there and wait? Nope. Could you be doing something better with your time while you wait? Definitely.

Well, then put option selling might be right for you.

The actual mechanics of put option selling is quite easy:

• When you enter into a put-sell transaction, you’re entering into an obligation to buy the stock you want at the price you want.

• The person on the other side of the transaction, the put option buyer, pays you money today for your obligation to buy that stock sometime in the future at your price.

Put option selling is a bullish option trading strategy while put option buying is a bearish strategy.

When someone thinks a stock is going to fall in price, they can either short the stock or buy a put option contract. If they opt to buy the put option contract, they have to pay for it at the going rate.

That’s where you, the put option seller, comes in. Since you’re bullish, you want to sell that put option and the option buyer will gladly pay you the going rate for it. You keep that money, deposit it into your account and wait for option expiration to come. Easy enough, but let’s go over some specifics.

Options Trade As Easily As Stocks

Options contracts trade in the marketplace just as easily as stocks do. All options have “strike prices.” These are the levels in which you can buy or sell the stock if called upon to do so.

For example, IBM is trading at $90 currently. The options exchanges set up strike prices at various levels, like the $80, $90, $100, $120, $150, etc. You will buy or sell these strike prices at the going rate for each. An option like this, with say five months before expiration, could cost roughly $750.

All options have an expiration date that can span from days to years. When someone buys a put option whose strike price is set lower than the current price of the stock, it’s called an “out-of-the-money” put option.

Option contracts represent 100 shares of stock, so for every option you sell, you’re obligating yourself to potentially buy 100 shares of stock.

If someone chooses to buy the “$80 put option” today when IBM is at $90, they are speculating that IBM will fall below $80 per share by option expiration date.

Why would anyone want to sell IBM at $80 when it’s currently trading $90? Why don’t they just sell it now at $90? Good question. Probably because this person already owns IBM shares in their account and wants protection in case of a disaster.

If IBM happens to fall to $60 per share before expiration, the put option buyer can “exercise” the option and sell IBM at $80 even though it’s now trading at $60. This is how professionals “hedge their position.”

But what happens if IBM never falls to $80 by expiration? Well, the option expires worthless and the put buyer ends up losing the full $750. Who gets to keep that money? You, the option seller! It’s been estimated that up to 90% of out-of-the-money options will expire worthless, so in most cases, you’ll get to keep the money free and clear.

How to Buy Stocks for Less With Put Option Selling

Let’s say that you want to own IBM at $80 per share while it’s trading at $90. Instead of putting in that limit-buy order and waiting, you now know that you could sell the $80 put option and collect $750 for every option that you sell.

If IBM happens to end up trading below $80 per share at option expiration, then you’ll be called upon to buy your shares at $80 per share. That’s a good thing because $80 was the price you wanted to acquire it, and $10 cheaper than where it had been trading. Not only that, but someone paid you $750 extra per option just for your time and effort to buy your stock at your price.

Since options trade in 100 multiples, the option is quoted as $7.50. When it’s time to collect the money, you will receive $750 (100 shares x $7.50).

Even better, that $7.50 actually lowers your cost basis if you have to buy the stock. Even though you’re buying IBM at $80 per share, it’s really only costing you $72.50 per share when you factor in the $7.50 you received up front – an extra bonus.

Here’s a sample option chain for IBM options that expire in April 2009. The option chain lists all options activity and the options that trade for a particular stock and can be accessed online or from your broker.

Courtesy www.optionsxpress.com

You can see with IBM currently at $88.22 per share, the April 2009 $80 put option can be sold for $7.50 (splitting the bid/ask prices). So for every option you sell, you will instantly collect $750. If you sold 5 put options, you would receive $3750.

Put Option Selling & Option Expiration Day 2009

Here’s what goes down at option expiration day in April 2009:

1. If IBM is trading above $80 at expiration, then the options will expire worthless and you get to keep the full $750, no questions asked. You can then move on and do another put-sell trade for a future expiration period. Unfortunately, you will not be asked to buy any shares at $80. But at least you were compensated $750 per option for your time.
2. If IBM is trading below $80 at expiration, then congratulations, you will be called upon to buy the shares at $80 a piece. This is good news because $80 was the price you wanted to acquire them. Plus, you still get to keep the $750 paid to you on Day 1. The shares will show up in your account and you’ll be required to pay for the shares in full at that time. If you sold five option contracts, which is the same as 500 shares of stock, you will be required to pay out $40,000 at that time.

Just remember, you’ll only get to buy the shares if the price of the stock is trading below the strike price on expiration day

A few points to consider before implementing a put-selling plan of attack:

1. Only sell put option contracts on stocks that you want to own for the long haul, as you might be required to buy them at expiration. We use this strategy to acquire high-quality, top-notch stocks. Don’t sell put options on risky stocks that you have no intention of buying, or only do it just to receive the put option income.
2. You will need to have an option trading account set up with your broker in order to sell put options.
3. Only sell the amount of put options that correspond to your buy levels. If you eventually want to buy 500 shares, then don’t sell more than five option contracts.
4. You will need to keep a percentage of money in your account on hold at all times while the trade is active. This percentage is called the “margin requirement” and is set by your broker. In most cases, your broker will ask you to keep anywhere from 10% to 50% of the full purchase price of the stock while the trade is active. This is great, as you don’t need to keep the full $40,000 (in the IBM example) on hold at all times. This still allows you to use your funds for other trades

That’s it, put selling, in a nutshell. It’s an alternative way to acquire stocks while getting paid for your time and effort. You get to pick the stock you want and the price at which you’re comfortable owning it.

Just remember, stick with quality stocks that you want to keep for the long haul.

Source: Put Option Selling: Get Paid to Buy the Stocks You Want