It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

For the rest of the article, read Ian Mathias at The Daily Reckoning.

Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

This has been a tough quarter for companies. Compared to last year’s second quarter, profit is down roughly 31 percent and revenue is down even more. Wall Street thought it was going to be even worse. So in one of the worst quarters ever, the market has rallied.

Investors learn all the wrong lessons from a rally like this. Nothing about it makes sense. The smallest companies are outgunning the biggest one. The most heavily shorted stocks are doing better than the least shorted stocks. The companies with the worst analyst ratings are outshining the ones with the best ratings. Everything about this rally is backwards.

Over the past 37 years – from 1972 to 2009 – these “best of breed” companies have made shareholders 2.3 times more money than the stock market as a whole. For every $100 you made from the stock market, you would have made $230 from these “best of breed” companies.

That’s not just slightly outperforming the market. That’s lapping the market and then some. And it’s even more impressive when you take into account everything this period covered. It’s been an eventful 37 years of embargoes, stagflation, a savings & loan crisis, an Asian economic crisis, a Russian national debt default, a near collapse of the Mexican peso, 9/11, two gulf wars, the bankruptcy of the Long-Term Capital Management hedge fund, the dotcom rise and fall, a bursting of the housing bubble, credit bubble and spending bubble. Forgive me if I’ve left some “minor stuff” out like the fall of the “Iron Curtain” and the rise of China.

Through all this, these companies gave their shareholders a steady and rising stream of revenue and a return that, as I’ve said, was more than 2.3 times what the markets gave. Who wouldn’t want that?

Everybody would. And that’s a big problem for all those mutual funds which don’t touch these companies … and for the hyper-active Wall Street press which makes a fuss over a dozen things every day but somehow misses the biggest story of all…

The existence of a class of companies which know how to put ever-increasing amounts of cash into the pockets of their shareholders, year in and year out, decade in and decade out.

Almost as bizarre as our junk rally are dividend-paying companies that can do no wrong. The ones strong enough and confident enough to raise dividends are going up in price. And the ones that are cutting dividends? Many of them are going up too.

Shareholders have recently been accepting smaller checks without protest and without selling their shares. They are evidently willing to take the hit today so the company can grow profits tomorrow. It’s easier to do when investors think that some kind of recovery is around the corner. If that recovery doesn’t materialize, these shareholders will be showing much less forgiveness to dividend cutters. I don’t want to own these companies when that happens.

If I were an investor in any of those companies, I’d sell my shares right away. The whole point of investing in the “best of breed” companies is that you get paid no matter what.

Everybody is cutting costs, the strong and weak companies alike. But not all dividend companies are cutting their dividends. Just slightly more than half are these days. It pays to invest in the dividend hikers, not so with the cutters. Let other investors be forced to rely on a recovery to reverse their portfolio losses.

You should be and can be making money even if the economy remains weak. As long as there are “best of breed” companies still raising their dividends, there’s no reason why you should sacrifice your pay “for the good of the company.”

The scary thing (for us and the Fed) is that low-interest rates aren’t speeding up the recovery. People aren’t willing to borrow. And banks aren’t willing to lend. The amount of money floating around the economy is pretty stagnant. The Fed should be pretty discouraged. They have $2 trillion on their balance sheet. And all they have to show for it are some banks which should have gone under but are instead giving its employees million-dollar bonuses.

Dividend companies are getting a little respect again. They may even have become the “new fad” according to the UK’s Telegraph. Here’s the money quote…

Few professional investors are banking on a return to the super-charged capital gains we have seen from equities in the past. Rather, the new fad is for companies capable of delivering reliable sources of income. Historically, dividends have been responsible for more than half the return on equities. In the more risk-averse environment which is the new norm it may be rather more than that.

But why be satisfied with just a “reliable source of income” when you could get income which is both reliable and growing. Perhaps the Telegraph doesn’t realize that with “best of breed” companies, you can have your cake and eat it too. But the Telegraph isn’t the only newspaper or media outlet that doesn’t “get it.”

Nobody is talking about these companies providing reliable revenue to shareholders for decades (yes, I said decades) and increasing their dividends at rates of 25-40 percent every year. Yes, I said 25-40 percent every year.

Do the math. A company raising its cash payments to you by 25 percent every year will double the money it pays you every three years! If you’re getting $10,000 in cash every year from a company now, in six years you’ll be getting $40,000.

These aren’t junk bonds. They’re not risky derivatives. They don’t depend on a bull market. These payments come from some of the safest and strongest companies in the market. When companies provide rising cash payments for decades and generate plenty of cash with above average profit margins, they qualify for “best of breed” status.

Actually, some people out there do “get it.” One of them is Hersh Cohen. He has managed the Legg Mason Partners Appreciation fund for the past 30 years. Over these three decades, his fund has done better than the S&P 500, the dividend-company benchmark index and the average return for large-capitalization stock funds. Cohen, who holds a doctorate in psychology, says he focuses on companies with “superior balance sheets and rising dividends.”

Cohen says his academic training helps him when the market goes to extremes. During such times he likes to go against the flow, cutting back when the market is euphoric and increasing his bets when others panic “and stuff is being given away.”

I’m not a fan of mutual funds. I think they’re terrible instruments, trapping investors into very narrow styles of investment long past the time when those styles made a buck. And I don’t think mutual fund managers are the sharpest tools in the investment shed. So when I see an exception, I try to point him out. Cohen is an exception.

If you’re interested in doubling your money every three years with very little risk, there’s only one way to do it. Invest in “best of breed” companies.

To your investing success,
Andrew

Source: Why ‘Best of Breed’ Investing Is No Passing Fad

The superhero S&P 500 added 3.4%. This means it’s 0.4% in the black for the year so far.
And here we were at Notes fretting over the recent dramatic spike in insider selling, the role of short covering in pushing stocks higher and the government’s funny games. In fact, so horribly emasculated did we become that we even wimpishly fretted over the lessons of history.
We recalled the Nasdaq crash of 2000 to 2002. It spawned two “healthy” rallies it spawned – one of 30.8% and one of 44.7% – before continued selling pressure took the market down to even greater lows. We also remembered the poor old Nikkei Index. Starting in 1990, it showed three very “healthy” rallies of 55%, 51.7% and 131% before collapsing and setting new lows.

And if you take a look at the chart above, you can see that during the Great Depression, the Dow saw no less than eight double-digit percentage-point rallies between 1929 and 1932 – a period when the index lost 90% of its value.

Immediately, I think to the Price-to-Earnings ratio of the S&P 500 index, as shown in Barron’s, and sure enough, earnings have been trending down for the entire year, which is, of course, bad news, as is proved when you see that the market value of the S&P 500 is down by about half in the last year, meaning that if you owned the stocks in the S&P 500 for the last year, then you have lost half of your money, and you are probably plenty upset!

So you would think that, you know, the P/E ratio would have fallen, especially since the prices of the stocks in the index (which are the P in the P/E ratio) have fallen by half, and you have lost half your damned money, about which you are still plenty peeved.

But surprise! Even though the S&P 500 index itself has fallen from about 1,590 a year ago (with a P/E of 18.9) to where the index is actually down by about half, earnings are down by half, too!

So this means that although the company made half as much money, and you, the hapless investor, lost half of your money investing in their stocks, both the P and the E went down, and thus the Price-to-Earnings ratio is still at an elevated 19! It’s actually higher! Hahaha!

Anyway, the point is that this current Price-to-Earnings ratio of 19 for the S&P 500 index is so high (audience shouts out, “How high, Mogambo?”) that it is still near where, historically, the market soon started down in a huge bear market, and is still high even after losing half its value! Gaaaah! I’m scared!

In fact, you can still have a high P/E of 19, indicating a high price, even if the earnings of the entire S&P 500 fell to a measly 1-cent and the shares in the index sold for a collective 19 cents! Hahaha! It’s weird!

You can tell by their faces that they are aghast that I would be ruining their presentation with my stupidities, and so they immediately get away from P/E ratios altogether, and instead turn to consumption and interest rates, whereupon they write, “consumers have started a spending strike, so any business that sells to them is heading into a huge headwind. This in itself is probably enough to do the damage but there’s more. Credit markets are at worst, closed and at best, much more expensive”, which they prove by noting, “Spreads for investment grade corporate bonds are 550 basis points over treasuries; even worse, junk bonds are a huge 20 percentage points above treasuries.”

They then cite a statistic that I have never heard of before, perhaps because I am an ignorant and stupid guy, but I was surprised to learn that “Looking forward, companies have no option but to slash capital expenditure, which is to say, slash other companies’ earnings, a vicious spiral that carries with it so much potential consequence that the Markit iTraxx Crossover Index is above 1000 for the first time since it was created, inferring that a record…number of companies are on the verge of default.”

Now, naturally I have no idea what in the hell any of this means, but I am always very interested in indicators that are in record territory, and I am willing to believe anything bad after hearing the words “on the verge of default”.

Then I remember that I am in gold, and I am calmed. Whew!

Of course, I’ll be ecstatic when gold zooms in price in response to such fiscal and monetary madness, but right now I am calmed. But really looking forward to ecstasy! And at these rates of monetary insanity, it can’t be far away! Whee!

Source: Markets Get an ‘F’ in P/E

U.S. stock futures pointed to another monumental beating on Friday – with leading contracts falling as much as rules allow — as a plunge in Asia reignited concerns about the health of the global economy.

S&P 500 futures dropped 60 points to 855.20 and Nasdaq 100 futures fell 85 points to 1,168.50. Dow industrial futures fell 550 points.

All three contracts fell so much that they reached pre-specified limits that can’t be broken until pit trading opens.

Thursday’s session for U.S. stocks was erratic but generally positive, with the Dow Jones Industrial Average closing 172 points higher and the S&P 500 rising 11 points, though the Nasdaq Composite slipped 11 points.

Read on at MarketWatch.

The idea here is that while spending stocks like RV builders, boat retailers, and automakers struggle, companies involved in the basics will continue to do well… These companies sell things folks “have to have” rather than “want to have.”

The new highs in coal, natural gas, oil services, and agriculture companies show this trend at work. These are all basic industries that help produce food, fuel, and electricity. All are soaring right now. Also soaring is Wal-Mart – the ultimate destination for buying things we “have to have.”

Wal-Mart doesn’t sell $25,000 motorcycles or mega motor homes. Just the cheapest, most basic stuff in America. Sales are robust, and shares have gained 30% this year. As today’s chart shows, it’s a bull market in the basics.

Source: Another New High for the Ultimate Basics Stock

This beaten-up environment is where our colleague Jeff Clark tends to make an absolute fortune trading “rebounds.” On May 12, Jeff told S&A Short Report readers the refiners were due for a bounce and recommended a leveraged trade on Tesoro, one of America’s largest refiners. His readers closed out half the position for 36% gains in less than a month.

If oil continues to decline from its extended levels, expect more gains from Tesoro and the rest of the refinery gang. Also, expect Jeff’s readers to make a ton of money with the best trader we know. Click here to learn more about a limited-time offer to get the S&A Short Report… before the price of Jeff’s in-demand advice is set to double.

Source: An Oil Tip from the Best Trader We Know

Our team, the Indians, was the underdog against the Rockies. In the bottom of the final inning, we were tied 13-13. We had two outs and a runner on third base. One of my youngest and smallest players, Will, was due up at bat. Will is also one of the fastest kids on the team. So I told him, “Any ball you hit on the ground to shortstop or third base is going to score a run if you can beat the throw to first. Are you ready to do that?”

Will said, “Coach, I’m ready to hit a home run.”

“All we need, Will,” I replied, “is a single. A single wins the game.”

“I know, Coach,” Will said. “But I haven’t hit a home run all year, and I know I can do it.”

What could I do? “Then swing away, Will. Go get your home run.”

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Sure enough, on the very first pitch, Will hit the ball harder than he had all year. It sailed out of the infield and was headed over the left fielder’s head. Any other time, and against any other team, that ball would have dropped and run all the way to the other field, and Will would have gotten his home run.

But on this day, the left fielder jumped, stretched way above his head, and somehow, miraculously, caught the ball in the webbing of the glove.

Will was out, and the game ended in a 13-13 tie.

No one seemed to care much. The parents enjoyed the game. Will hit the ball harder than he had all year. And both teams moved on to the next round.

But I was in a funk all weekend because we missed an opportunity for a win. “If only I insisted he hit the ball on the ground,” I told my wife when she asked why I was so quiet after the game.

She looked at me with those eyes that every husband has seen when he’s said something stupid and said, “So what do you do when you miss an opportunity for a good trade? Do you sulk? Or do you find a way to come up with another winning trade?”

And that’s where this becomes a lesson about trading. You see, I missed a trade yesterday. After looking at hundreds of charts, I was bearish on the market. So I told S&A Short Report subscribers to buy puts on the Nasdaq 100 Index.

But just like the Indians missed a chance to beat the Rockies, we missed the trade.

The stock market gapped lower on Monday morning. And the trade I had my eye on ran away from us. We couldn’t get into it at a favorable price. My first thought was, “If only I’d made the recommendation on Friday instead.” But I almost never trade on Fridays. Too many unknowns can happen over a weekend. So, the opportunity slipped away from us.

No big deal, really. Traders miss out on thousands of opportunities during a career. So now, the real question is, what looks good to trade today?

We missed the opportunity to buy Nasdaq puts on Monday, but I’m still bearish on the market. I’m looking for a chance to short the Nasdaq at a good price.

Good investing,

Jeff

P.S. I’m constantly looking out for the market’s best trades and sending e-mail alerts to Short Report subscribers. They’ll be the first to know of my favorite trading opportunities.

In fact, I think we’ll have another shot at the Nasdaq puts some time this week. If you’d like to get in on it, then click here.

P.P.S. As it turns out, we can’t have a tie in Little League playoffs. So the Indians and the Rockies are going at it again tonight. We’ll play however many innings are necessary to determine a winner. And I’ll share the results with you on Thursday.

Source: What to Do When You Miss Out on a Trade