Discovering Growth in Micro-Cap Stocks

Here is good news for those of you who may have an interest in micro-cap stocks. There is now a new weekly newsletter available online on this very subject. It is free and can be accessed by going to "MICROCAP GEMS NEWSLETTER" which you can find in our "Links" section.

However, be forewarned that while the micro-cap arena offers the possibility for an investor to reap the greatest gains from investing in individual stocks, it is also the most volatile and therefore should be ventured into only with funds that you could afford to lose, as the likelihood of losses is much greater in this sector - but oh, how delightful are the gains!

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How Do You Rate?

Do you have a golden nest egg or a merely copper one?

There is a new online calculator from A.G. Edwards that lets you figure out how well you are building wealth vs. the rest of the U.S. public. (Note: You can find this calculator in our "Links" listing under "Nest Egg Score.")

Americans have an average score of 631, a strong "fair" rating based on a system that's similar to scores used by the nation's major credit bureaus. (A 549 or lower is poor, while a 750 and up is considered excellent.) A "fair" score is a little bit better than you might expect, considering the average savings rate, says an A.G. Edwards financial planning specialist.

That's because the scoring system goes beyond the personal savings rate, which measures what Americans make and spend, and factors in housing and investment values, participation in retirement plans, and cost-of-living data. Thanks to rising home values, low interest rates, and a resilient stock market, nest eggs are in decent shape.

The National Nest Egg Score is compiled from a recent Harris Interactive survey of more than 2,000 U.S. adults. Figuring out your own score takes just a few minutes. You'll need to answer 14 questions, including your household net worth, years to retirement, and whether you plan to save or invest this year.

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Around The World In ETFs

Rydex Investments has six new ways to profit from a falling dollar. By the end of June, Rydex plans to launch six more currency-based ETFs to supplement its six-month old, $700 million euro ETF.

The new ones will each track a specific currency, and here now is a listing of the six currencies, together with their respective trading symbols.

BRITISH POUND (FXB)

CANADIAN DOLLAR (FXC)

MEXICAN PESO (FXM)

SWISS FRANC (FXF)

SWEDISH KRONA (FXS)

AUSTRALIAN DOLLAR (FXA)


Each ETF will represent either 100 or 1,000 units of the respective currency, pay a currency-specific yield, and have a 0.40% expense ratio.

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REAL Money Is Inflation-Proof

If you can remember back to the time when gasoline sold for 25-cents per gallon, then we now know two facts about you: 1) You are older than most other people, and 2) you were living when our dollar was backed by REAL money, in the form of real silver!

Guess what? That same amount of silver still buys 4-gallons of gas in today's world - which just goes to prove that REAL money like gold and silver holds its value, while it is the green paper money that is now worth a lot less!

When you really think about it, you must realize the fact that food, gasoline, and almost everything else has NOT gotten more expensive. It only seems that way because the value of the green paper money is worth less and less, and so it takes more and more of it to buy the same amount of goods and services.

Most people think that prices have gone up, but in reality, it is the value of the U.S. dollar that has actually gone down. And it is the Federal Reserve that creates inflation whenever it issues U.S. dollars which are backed by government debt.

Since 1913, when "The Creature From Jekyll Island" (aka, The Federal Reserve) came into being, your money has lost 96% of its purchasing power due to inflation. The more "money" the Federal Reserve creates - the less your Federal Reserve "money" will buy.

It took 88 years - from 1913 to 2001 - for the national debt to grow to $6 trillion. It took just three more years - 2001 to 2004 - to grow to $7 trillion; and just one more year to get to $8 trillion. The acceleration of the national debt is alarming. The corresponding loss of your purchasing power may also accelerate in the near future.

Each and every Federal Reserve Note is backed by nothing more than our national debt. Thus, when you hold a Federal Reserve Note, you own debt that you will eventually have to repay. And whenever you give a Federal Reserve Note to someone as payment, that person now has debt. Ouch!

Here's something to think about... If someone gave you a choice between a stack of ordinary ten-dollar bills (Federal Reserve Notes) and a stack of ten-dollar bills that were printed on the back with a coupon for 5 gallons of gasoline, redeemable at any gas station in the country, which would you choose?

The first stack is just dollar bills. The second stack is also dollar bills, or if gas prices go up, you can use the back of the bills to fill your tank. So you'd have to be crazy to take that first stack!

Well interestingly enough, there is now something available that works in much the same way as "stack 2" described above. These are known as, "Liberty Dollars" - which are backed by both gold and silver - and you can learn more about them by clicking on "Liberty Dollars" in our "Links" listing.

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Thoughts of Chairman Buffett

"Investing is the greatest business in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity. All day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it."

-Warren Buffett - Forbes, November 1, 1974

Is Your Mutual Fund Really Your Friend?

Before Tyco bought former CEO Dennis Kozlowski a $17 million Manhattan pad, a few shareholders had already been demanding more corporate accountability. One of them, the International Brotherhood of Electrical Workers pension fund, submitted a shareholder proposal to the Tyco board that called for a more independent board of directors. However, the majority of shareholders and Tyco's board killed the proposal.

But what really steams some investors is that Fidelity Investments, the largest Tyco shareholder at the time and thus the one with the biggest say in the matter, voted against the measure.

That should come as no surprise however, because Fidelity, as well as other mutual fund firms, routinely vote with management - and against shareholders - to preserve lucrative business relationships they have with the companies. Fidelity, for example, collected about $1.8 million in fees from Tyco in 1998-99 for running the firm's retirement plans.

"There's a lot of pressure, real or imagined, to vote the way management would like you to," says John Bogle, founder of the Vanguard Group. Vanguard and many other fund companies work for both management and shareholders, a conflict of interest that investor advocates say typically results in shareholders' being left out in the cold.

The fund companies' dual roles can often sting investors, and it's not hard to find examples. Revelations of executive misconduct at Tyco and cozy relationships between board members and management helped send the price of Tyco shares plummeting 78 pecent, costing shareholders some $93 billion.

For its part, Fidelity says there is absolutely no conflict of interest. "When we vote our proxies, we only consider our mutual fund shareholders' interests," saya a Fidelity spokesman. But an AFL-CIO survey showed that Fidelity voted against corporate governance measures - as determined by the union at selected companies - more than 75 percent of the time. And, the pro-management stance continues!

Fidelity and other fund companies say they work more effectively in private, meeting face to face with company directors and executives to negotiate changes. But the proof isn't in the pudding, respond critics. Mutual funds hold about 21 percent of all U.S. stocks. That's a lot of muscle to rally behind calls for independent audit committees and reasonable executive pay.

A big part of the problem is that no one really knows how funds like Fidelity and Vanguard are voting all the shares they hold. The Securities and Exchange Commission, which regulates mutual funds, does not require firms to disclose how they vote - not even to individual shareholders - so they don't. "Their general attitude is that it's none of fund holders' business how they vote," says Mercer Bullard, former assistant chief counsel at the SEC and founder of Fund Democracy, a mutual fund advocacy group.

Traditionally, the fund industry has stubbornly resisted disclosure. According to the Investment Company Institute, which represents the mutual fund industry, confidential voting is a better solution. If the vote is secret, the company doesn't know how the fund has voted, thus management cannot reward or penalize a fund for its votes by awarding or withdrawing business. Currently, few companies use secret ballots in proxy votes.

But that misses the point because investors in mutual funds are entitled to a level of awareness as to how their shares are being voted. And thanks to the shenanigans of the likes of Enron, WorldCom and Tyco, fund shareholders may get their wish.

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Explaining The Recent Market Turmoil

According to the current issue of the Zacks Report, the market came under some pressure in May due primarily to inflation concerns. Starting May 10th, investors began selling any asset class that had been generating returns over the past year and rotated into defensive sectors and non-performing asset classes on the concern that unexpected inflation will ultimately sap gains.

The recent weakness presents an excellent buying opportunity as the selling is not being driven by deteriorating fundamentals.

The current rotation into defensive stocks is being driven by a change in investor sentiment as opposed to any fundamental change in earnings or interest rates. Despite the focus on the Fed, the Ten-year Treasury note rate remains relatively low.

Interest rates have generally eased back down over the last month and the yield curve is still basically flat, but with a bit of an upward slope. This is a clear indication that the bond market is far more concerned with an economic slowdown than with inflation. In fact, the yield curve is consistent with moderate economic growth going forward - a scenario which would be very positive for equities.

Additionally, the earnings yield on the S&P 500, based on 2006 earnings estimates, remains well above the yield on the U.S. Ten-year Treasury note. Currently the S&P 500 is yielding 6.63% while the Ten-year Treasury note is yielding 5.05%. This signals that stocks are undervalued relative to bonds.

Bond yields are not the only reason to remain bullish about equities despite the recent turbulence. Full-year earnings estimates rose last week. During the past week, earnings estimates were raised on 104 S&P 500 member companies and lowered on only 70 companies. Over the last month, a total of 600 estimates for the current fiscal year have been raised versus only 368 that have been cut (a ratio of 1.63). For 2007, 503 earnings estimates were raised while only 283 were cut (a ratio of 1.78). These are both relatively high readings, indicating little chance that earnings are about to collapse.

The median firm within the S&P 500 should achieve 11.8% earnings growth in fiscal year 2006. Although such growth would represent a decline from the first-quarter's 12.8% year-over-year pace of earnings growth, it is still very healthy.

At this point the greatest risk to the market is the ugly possibility of inflation combined with slowing economic growth. However, we do not believe that the economy will slow substantially as corporate earnings remain strong and the yield curve is clearly not reflecting inflation concerns.

The key question comes down to whether we are at a turning point in the U.S. economy. The U.S. economy grew 5.3% in the first quarter of 2006, rebounding from the fourth-quarter's sluggish hurricane-restrained pace. GDP growth is on track to slow to a below-trend pace near 3% in the second quarter. Surging energy prices and drag from decling housing starts help to account for the sharp near-term slowing.

We expect that core CPI inflation will subside to within the Federal Reserve's 1-1/2% to 2-1/2% implicit comfort zone. Importantly, moderate wage gains have been accompanied by robust increases in labor productivity, so that unit labor cost growth remains well behaved. The net result is that the market has more to fear from an economic slowdown than from inflation.

The concern is not that inflation will materialize but rather that the Fed has overshot and as a result pushed the economy into a contraction. The lag effect of rising interest rates on economic activity is about eight months, indicating that the rate hikes Chairman Bernanke is wedded to will not begin to show up in the macro-economic data until much later.

Conclusions: If the economy does not go into a recession and earnings growth is sustainable, then stocks will be moving much higher as they are fundamentally undervalued at current levels. Furthermore, whenever there is a large bearish sentiment in the marketplace, such as today, the market has a tendency to surprise the conventional wisdom and head higher.

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