Words To Live By

Twenty years from now, you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore.

- Mark Twain

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BHP Glitters!

Anglo-Australian mining giant BHP Billiton once again proved its Midas touch on September 26 by announcing that yearly gold output at its Olympic Dam mine will be more than 10% greater than previously thought. That makes it one of the world's richest mines and pushed BHP stock up to a record as gold prices neared a 30-year high.

On September 28th, BHP closed at $78.60 per share.

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The Weakening Dollar

On September 25th, the euro hit a new high against the greenback, more than $1.41. And in the ultimate indignity, the Canadian dollar is now trading almost at par with the U.S. dollar.

The huge U.S. deficit and the Fed's rate cut on September 18 are weighing on the dollar, but it's not in free fall - just yet.

Against a broad, inflation-adjusted market basket of foreign monies, the U.S. dollar is still above the bottoms of 1994 and 1995.

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Going For The Gold

Gold stocks can provide valuable diversification. It's true that gold stocks might have modest long-term returns, perhaps one or two percentage points over inflation. But they can deliver an additional benefit because gold stocks perform much differently from other investments.

You might set aside 3% of your portfolio for these stocks. When that allocation dips, buy more stocks, but sell when they move well above 5% of your portfolio. This buy-low, sell-high strategy can add significantly to your investment returns.

Gold stocks (usually, mining companies) are much more volatile than the underlying gold price, so this rebalancing strategy will work better with stocks than with gold bullion.

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COMMENTARY

In an effort to get the "complete picture" about what exactly is going on with the global economic scene, I subscribe to a newsletter based in Europe, which normally sends periodic e-mail updates giving their assessment of current events. Whenever something significant happens that requires in-depth coverage, they send a printed "hard-copy" newsletter - and today, I received just such a newsletter.

This newsletter comprises ten (10) very detailed pages which I cannot duplicate here on the Web - but instead I will give you the gist of their message and then fill you in later in greater detail at our October meeting. So here in brief is what they have to say:



BEYOND THE PANIC - WHAT TO EXPECT...

Don't be fooled! What is currently and widely being considered as a "brief storm," a "healthy and long-overdue correction," a "short-term technical pause in the bull market," is but the ugly messenger of more to come. August, 2007 should have served the prudent and savvy investor as a welcome warning.

In late September of 2006, statistics were published that clearly painted an imminent problem in the US housing sector. The Housing Market Index had fallen from above 70 to 30 within only a few months. Toll Brothers, the US homebuilder, considered the slump in residential construction "the worst in the past 40 years."

In our Newsletter of October, 2006, we alerted our readers to the possibility that decades of accelerating credit expansion and debt had finally reached the boiling point. We emphasized the growing threat of a severe credit crunch. In our view, a "soft landing" was the best possible, but least likely, scenario to hope for. Here's an excerpt from that 2006 Newsletter.

"ALL credit transactions are INCOMPLETE exchanges. They are never completed until full due payment is made. In this respect, we may be facing a massive crisis. The US owes the world more than its own internal economy can even get close to producing. Furthermore, tens of millions of Americans owe their banks more than they can ever hope to earn and repay.

Thus, a double bankruptcy is in the making. The US economy cannot repay the world what it owes. Americans cannot repay what they themselves owe to their lenders. Credit is to be repaid in the future. When the future arrives, all credit is DEBT. The US Treasury is bankrupt. If it tried to cover its present spending and future liabilities with matching taxes, it would drive American businesses and households into bankruptcy under the load of taxes. The government can't help Americans and Americans can't help the government!"

This was written a year ago. Obviously, things have evolved since then. In particular, August, '07 SURPRISED everyone with the "Subprime Crisis." In the past, we encountered the Tequila Crisis, the Russia Crisis, or the China Crisis. Financial market crises tend to be named according to their "birthplaces." Therefore, this latest financial market crisis should be termed the "US Crisis." That is precisely where the epicentre lies. And, although the crisis is currently more conveniently termed the "Subprime Crisis," one should easily recognize that Mr. Subprime is but a scapegoat for a much larger and very American culprit.

We quite simply call the true culprit "EASY MONEY." This fellow is a smooth operator: manicured fingers, perfect nose job and all the rest. Many are fooled by his looks, not recognizing the cesspool beyond the deceitful smile. In our books, "Subprime" is but a pimple on Easy Money's rear end. It is a symptom of a larger problem, one that unfortunately has become a very particular and entrenched element of the American lifestyle. And one, which has spilled over into international financial markets and global economies.

So, was that it? Did the August "correction" re-boot and purify global financial markets? Has the legacy of Easy Money been purged by a few weeks of market revolt? Has Mr. Bernanke avoided the consequences one would expect from decades of loose monetary policies merely by the whip of his magic discount wand?

Possibly, just possibly, if that trust can be kept alive for just a bit longer, and then a few days more, you might experience the much hoped for "soft landing."

But we don't think so. We ask you this: Has anything really changed? Was the subprime imbalance the fundamental problem, or was it a mere symptom of a more serious large-scale issue?

Dear reader, we expect more to come. The subprime imbalance is not corrected yet. Nor has the system been cleansed of other Easy Money "pimples." So we urgently recommend your prioritizing risk management and wealth preservation over profits TODAY.

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All Pumped Up

In the summer of 2005, soaring energy costs were front-page news. Now in 2007, we have higher oli prices - but there has been no outcry.

This lack of opposition indicates that energy prices may continue to climb. However, big name oil stocks still trail the S&P 500 in year-to-date performance. The S&P Energy Index's price/earnings ratio is 12, well below its 10-year average of 19.

Those investors who are interested in the energy sector as an investment should take note of offshore drillers who now offer an appealing combination of earnings growth prospects and low valuations.

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A Very Interesting Commentary

If you had been listening to the Noon Business Hour over station WBBM today, you would have heard comments coming from Mr. Craig Smith, President of Swiss America Trading Corp..

Now what he had to say is strictly his opinion, but I believe it is well worth paying attention to his comments. Mr. Smith pulled no punches when he said that, "We are definitely going to have a recession in this country followed by a period of very high inflation."

And I would like to recommend that you check out SWISS AMERICA in our "Links" section to read other interesting articles by Mr. Smith. When you go to the Home Page at SWISS AMERICA, click on the "EDUCATION" button on the banner at the top of the page, then Click on "Craig's Articles" and be certain to pay particular attention to his article entitled, "In Whose Numbers Do You Trust?"

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Where To Invest During A Recession

At our meeting last evening the subject of RECESSION was mentioned, and someone asked about where we should be invested during times of recession. I didn't have the answer to that question at the time, but now I do.

In my own personal investment library at home I have a book (long since out of print) and written in 1970, by the late investment advisor, Harry Browne. The book title is, "How You Can Profit From The Coming Devaluation."

Obviously, this book was somewhat ahead of its time but now seems to be quite current, what with "Helicopter Ben" being in control over at the Fed!

The book covers a whole slew of investments along with recommendations as to whether a particular investment type is either Very Good, Good, Break-Even, Risky, Very Bad, or simply Uncertain.

In times of RECESSION, no investment type is rated as "Very Good," and only two investments are considered to be "Good" - and these include Gold Stocks and Short Selling.

Gold bullion is considered as "Break-Even" during a RECESSION, while Gold Coins are considered to be a "BAD" investment during recessionary times.

Other investment categories considered to be "Break-Even" during a RECESSION include: Bonds, Cash & Savings Accounts, Gold Bullion, Life Insurance, Mortgages, and Swiss Francs.

Other investment categories considered to be "BAD" to own during a RECESSION include: Commodities, Diamonds and other Gems, Gold Coins, Income Real Estate, Raw Land, Residential Real Estate, Silver Bullion, Silver Coins, Silver Stocks, as well as Stocks, ETFs and Mutual Funds.

Hopefully this will answer the question from last evening's meeting and also provide us with a stimulating topic for our next get-together on October 18th.

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McDonald's Is Really Sizzling

The sales at McDonald's are even hotter than its coffee. While rivals like Wendy's are stumbling, McDonald's said on September 11 that same-store-sales reached a better than expected 8.1% in August.

The world's number one fast-food company, now in the fifth year of a global comeback, credited the gain in part to its brisk breakfast business and its fast-selling chicken snack wraps.

And the recent 50-cent dividend increase makes the return on McDonald's stock all the more appealing. Worth keeping a watchful eye on this issue perhaps?

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Taking A Positive Spin

A study by Lehman Brothers found that spinoffs beat the S&P 500 by an average of 18% in their first two years as independent companies.

Among the reasons are these: a new stock often trades at a discount early on because investors who never meant to own it sell their shares - thus driving down the price, while eager buyers don't arrive until there is analyst coverage as well as a track record.

Also, managers of the new company are often motivated by incentives tied directly to its performance, in a way that was impossible in a larger company.

And incidentally, the former owner that "sired" the new spinoff often tends to beat the market as well, after shedding a division that really did not fit well with other corporate businesses.

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The Wisdom of Warren Buffett

"If you understand an idea, you can express it so others can understand it."


This is Warren's way of testing whether he really understands a business before investing in it. If he can't explain it, he doesn't really understand it. He will not invest in a business he doesn't understand - nor should you!

In the struggle to be able to express an idea, you must acquire a fair degree of understanding, which is a good thing if it is an investment idea. This standard requires that you do your research before you buy the stock.

Warren's rule is simple: Can't explain it - stay away from it.

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The Convenience of Cash

Cash investments can add stability and flexibility to your financial strategy, and income to your portfolio - all of which become increasingly important when you retire.

Yields on cash investments are higher than in recent years, making cash even more attractive. Here are some of the ways you can put your cash to work to help you meet your day-to-day financial needs.

Everyone needs cash for daily living expenses. If you're still working, it would be a smart move to hold three to six months' living expenses in a separate emergency fund to cope with unexpected financial needs. For retired investors, a good idea would be to set aside enough money to cover the next 12 months' worth of portfolio cash withdrawls. And you should consider this as money that is "already spent."

It's also a good idea to invest another two to four years' worth of expenses in "near-cash" investments such as ultra-short bond funds or longer-term CDs, which typically pay higher returns than money funds do but are slightly less liquid. That way, if a bear market occurs, you might be able to avoid having to sell stocks or other growth investments at relatively low prices to meet living expenses. These additional cash balances can also create flexibility in your personal plans, allowing you to make an unexpected purchase without dipping into stock funds or other long-term investments.

Cash investments can play an important role in your finances, especially during retirement. This includes providing ready money to meet daily expenses and cope with emergencies, as well as adding steadiness to your long-term investment portfolio.

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Private Companies In The Public Market

Private equity investments generally are illiquid, with high minimum investments. Average investors can participate in potentially lucrative private companies via business development companies (BDCs), which are accessible to anyone with a brokerage account.

A BDC is a holding company that invests in the debt or equity of operating companies, typically private businesses. BDC managers tend to run those businesses like private equity or venture capital firms. There are 22 BDCs currently trading on U.S. exchanges.

Most of the largest BDCs have dividend yields over 8%. And a BDC escapes corporate income tax if it passes through at least 90% of profits to shareholders.

You can find a listing at Quantum Online (in our "Links" section). The BDCs are listed under "Stock Lists," which is in the middle of the navigation bar.

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Life 101

Tomorrow is the most important thing in life.
Comes into us at midnight very clean.
It's perfect when it arrives and puts itself in our hands.
It hopes we've learned something from yesterday.

-John Wayne

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NEXT MEETING: Thursday - September 20, 2007

This month we have a very special guest speaker, Mr. Matt Shapiro, President of MWS Capital. The title of his talk: "The Joker Effect - Preparing for Risk in Today's Marketplace."

Matt will also have some new stock-pick recommendations, and I'm interested to see whether he does as well on his stock recommendations this time around as he did earlier this year in March, when he was my guest speaker at the Chicago Chapter meeting in downtown Chicago.

NOTE: Lest you forget, at our meeting last month I proposed that you come to this month's meeting and give me your prediction on where the Dow will finish the year on December 31, 2007. The person who comes the closest to the correct year-ending number will win a free year's membership for 2008!

If we have any time left after our speaker finishes, we can devote that to discussing our new portfolio study.
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We meet at DePaul University, located at 150 West Warrenville Road in Naperville, Illinois. The meeting begins at 7:00 PM and ends at 9:00 PM. The room number will be posted on the easel standing near the reception desk in the main lobby.

Our meetings are held twelve (12) times a year, normally on the third Thursday of each month. Membership is a modest $15.00 per year, and anyone who shares our interest is talking and learning about investing is always welcome. You need not be a member of AAII in order to attend. [NOTE: our membership fee covers the annual donation to DePaul for providing us the excellent meeting facility, as well as for incidental printing expenses when we publish free handouts at various times during the year.]


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The Baby Boomer Effect

Some investors are worried about a possible destabilizing effect on the market when the Baby Boomer generation begins to sell shares of stock as they retire starting in 2008. This however should not be a concern because stock prices are based on companies' earnings growth and demand for the stock, and there should continue to be demand for the stocks of profitable firms.

Also, those Baby Boomers who do sell their stock are likely to do so more slowly than many people expect because equity investing is one way to try to outpace inflation.

In any event, it would be foolish for the average investor to avoid buying stocks in fear of any impact to the market that might result from Baby Boomer sales.

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Structured Products

The Structured Products Association says that structured products are "the fastest growing investment class in the U.S.," on pace for its first $100 billion year in 2007.

Structured products, offered by major financial firms, are securities created to deliver a specific risk-reward scenario. A hypothetical arrangement would give the investor twice the return of the S&P 500, capped at 12%, while the investor's principal would be protected against loss at maturity, which might be three years or longer.

Some structured products are more complicated. Investors can get structured products for as little as $5,000, or $2,000 for IRAs.

It should be noted that some structured products generate income tax in years when no cash has been received, so they probably work best in a tax-deferred account.

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Wisdom of the Ages

Men stumble over the truth from time to time, but most pick themselves up and hurry off as if nothing happened.

-Sir Winston Churchill


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Knowing When To Sell

There is no magic involved in deciding when to sell a stock. You should track the companies you own and if the prospects have waned since you bought the stock, it's time to cash out and look for a better investment.

One tactic is to set trailing stops when you buy a stock. You might tell yourself that you'll look at the stock if it goes up by 25%. On the other hand, you'll re-evaluate the stock after a 20% decline.

At those points, you can consider whether you still want to own that company. Selling at a 10% or a 20% loss can be a worthwhile move, if it helps you avoid a 50% or a 90% loss.

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Bob Brinker Alert

If you listen to Bob Brinker Saturdays and Sundays over radio station WLS in Chicago, you need to be aware that the program will be pre-empted from time to time during the football season which is now upon us.

This can be very annoying - especially if you are not particularly a sports fan - however, there is an easy solution at hand.

Simply use the Internet to access Bob Brinker by going to either www.KGO.com or to www.KABC.com as both stations carry the program, although sometimes on a delayed basis.

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Stock-Traders, Beware!

The "rules-of-the-game" are changing and higher prices for stock-trading accounts are coming by October 1, 2007. This is a court-mandated switch that will mean higher fees in many cases.

Under the new rules, brokerages must move investors in these accounts to either traditional stockbroker accounts that charge commissions or else to fee-based advisery accounts, managed by registered investment advisers.

One possible alternative to this would be to move your trading account to a discount broker with lower commissions.

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