Income Tripler

Small-Cap Stocks: The Most Important Trend Headed into 2009

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, December 23, 2008: Issue #906

Yesterday we got confirmation that the U.S. economy contracted by 0.5% in the third quarter. And most economists expect the downturn to accelerate, with GDP checking in as low as negative 6% in the fourth quarter. Here’s why I’m not concerned…

A more important trend is emerging. Remember, on November 19 I told you to consider going big, by going small with small caps. Well, the markets didn’t leave much time for preparation.

In that short span, small caps jumped 6.38%, almost tripling the returns of large caps, based on the Russell 2000 and Russell 3000 indexes. Of course, it’s too early to declare a full-blown rally. But we shouldn’t be ignorant to the subtle shifts in market leadership.

Remember, the market’s a forward-looking beast. And that means even in the darkest hours we need to be thinking about the next bull market… and positioning ourselves to profit.

Read more…

Louis Basenese 2008 Archives, Stock Tips Site Map, Top Home Page recession beating investment, small caps, small-cap stocks

The Falling U.S. Dollar: Taking An About-Face

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, December 17, 2008: Issue #902

Investing requires tough decisions. What to buy? When to buy? How much?

But none more difficult than this: Admitting the fundamentals no longer support an investment you own. Or, as the French philosopher Geoffrey F. Abert summed it up over 900 years ago, “It often takes more courage to change one’s opinion than to stick to it.”

And today I’m living proof.

Just three weeks ago, to the day, I declared, “The dollar’s not done.” I laid out my case about Jim Roger’s being wrong.

But I’m officially changing my stance on the falling U.S. dollar.

To be clear, it’s not because I finally saw the light, recognized the error of my ways, or heeded the “sage” advice of so many of you that wrote in to chastise my “foolishness” or “ignorance.” And I didn’t get a personal phone call from Jim Rogers, either.

Read more…

Louis Basenese 2008 Archives, Interest Rates & The Dollar, Top Home Page, U.S. Economy & The Stock Market dollar index, falling U.S. dollar, weak dollar

32 Billion Reasons The Average Investor Will Fail

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, December 11, 2008: Issue #899

I’ll be the first to concede the going’s tough. That almost every “time-tested” strategy that worked well in bull markets is sputtering and collapsing.

But is it so bad we’ve given up on turning a profit? And just resigned ourselves to preserving our principal, right?

WRONG.

This week the Treasury sold $32 billion in 4-week bills at a yield of ZERO percent.

That’s not a typo. Investors actually clamored for the opportunity to lend the government their money in return for absolutely no return. In fact, investors bid $126 billion at the auction, more than four times the amount available.

As Michael Franzese, the head of government bond trading at Standard Chartered explains, “I have never seen this before… It’s all about capital preservation for the turn of the year, not capital appreciation.”

Forget unbelievable. It’s idiotic. What investors are essentially saying is that absolutely no better opportunity exists in the market right now - that survival is their paramount goal of investing, not profiting. But ignore what the lemmings are doing. Their folly is creating endless (and historic) opportunities for us to increase our wealth. Of course, simply telling you that will not suffice…

Read more…

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Value Investors - Beware The Value Traps

by Louis Basenese, Advisory Panelist
Associate Investment Director, The Oxford Club
Wednesday, December 3, 2008: Issue #895

Value investors, consider this your warning… With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” - stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

Read more…

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Jim Rogers is Wrong… The Dollar’s Not Done

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, November 26, 2008: Issue #892

Recall, in late March I predicted here the dollar was overdue for a rally. Ninety-six percent of you cursed me. The other 4% pocketed an easy 20% or so (more if you played the options market).

But after such a swift run - mind you similar moves in currencies typically take years, not months - is the dollar rally finally coming unhinged?

Legendary investor Jim Rogers seems to think so…

As he told Bloomberg News in a TV interview, he plans to exit his dollar holdings because he thinks the dollar “will go down a lot” and it is “going to lose its status as the world’s reserve currency.”

To which I simply respond, “Into what Jimbo?”

No other choice for a reserve currency exists. No matter how much other governments wish it were so.



The euro is frequently mentioned. But it’s depreciating in value. And there’s not enough liquidity to handle the demand. Plus, it’s still a prepubescent, experimental currency, not one governments can invest in with 100% faith.

Moreover, with two-thirds of foreign reserves already in dollars, it would take more than eight years to replace the dollar as the currency of choice.

So once again, I’m striking out on my own. (And I’m ready for the flood of fan e-mails.) While many pundits would like you to believe that the dollar rally will be short-lived, I completely disagree.

The dollar’s not done.

Today I offer up three more reasons why. And of course, three ways to play it…

Read more…

Louis Basenese 2008 Archives, Interest Rates & The Dollar, Interest Rates and the Dollar Site Map, Louis Basenese jim rogers, strong dollar

Small Caps: It’s Time to Think Small

by Louis Basenese, Advisory Panelist
Associate Investment Director, The Oxford Club
Wednesday, November 19, 2008: Issue #888

Over one million jobs vanished this year. Retail sales cratered for the eleventh consecutive month. Auto sales, and for that matter automakers, are headed for the junkyard. And there’s no sign of consumer confidence anywhere.

It’s not official yet. Apparently the committee of “esteemed” economists at the National Bureau of Economic Research (NBER) doesn’t get paid for timeliness. But the statistics don’t lie… we’re in a recession.

And that’s got me giddier than an Obama supporter scoring an inauguration ticket. That’s right. I’m actually glad the economic data stinks. Because when a recession is here, a small-cap rally isn’t far behind.

Accordingly, I’m loading up on small caps in my own portfolio. I suggest you do the same, instead of joining the lemmings piling into Treasuries.

If you’re reluctant and afraid small caps are too risky, chew on this:

In the year following the six major bear markets of the last century, small cap stocks soared an average of 82%, according to Ibbotson Associates.

If the prospect of an 82% gain doesn’t excite you in these trying markets, check your pulse. If it does, read on…

Read more…

Louis Basenese 2008 Archives, Investment Strategies, Louis Basenese small cap companies, small caps, small-cap stocks

The Baltic Dry Index: The Only Economic Indicator Worth Tracking Right Now

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, November 12, 2008: Issue #884

Forget unemployment. Inflation. Consumer confidence. Personal Incomes…

You can even ignore the ever-popular gross domestic product (GDP).

Most of the indicators that the market relies on to forecast the future are worthless in this type of environment. The truth is the data coming out of the traditional economic indicators isn’t current. By the time it’s being reported, the information is already weeks or even months old.

If you want to know when the global slowdown that’s erased $28 trillion in wealth (so far) will finally reverse course, pay attention to the obscure Baltic Dry Index. And nothing else. Here’s why…

Read more…

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Long-Term Investment Goals: Answers to The Top 3 Investing Questions Right Now

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, October 16, 2008: Issue #872

With Investment U having over 360,000 members and The Oxford Club with over 70,000, Alex Green and I always get a steady stream of questions. But in recent weeks, as the market has accelerated its descent, they’ve become increasingly alarmist.

As I’ve learned, when we give into panic, we act hastily. And often undermine our long-term investment goals.

So today, let’s put to rest some of your pressing concerns. And make sure that doesn’t happen.

Long Term Investment Goals: Is My Cash Safe?

When my grandfather died, my grandmother found $17,000 lying around the house. He was Italian. So yes, some was stashed under mattresses. Some was in coffee cans behind the refrigerator in the basement. And more still was found in his sock drawer.

Forget the terrible investment implication of earning no interest on this money. My father almost burnt the house down when he was 12. And my great uncle was convicted of arson. So an “accidental” fire, not inflation, was a bigger threat to his savings.

My point: There’s a lot of fear in the market. Banks continue to go under. Many people are trying to predict the next collapse, and move their assets in advance. (I can empathize because I bank with Washington Mutual, now JP Morgan.) But whatever you do, be smarter than us Italians. The mattress is not a safe or smart place for cash.

In all seriousness, if we take a few simple steps, we can keep all our cash in the bank, and make sure every penny is insured.

The rescue package increased the FDIC limits up $250,000 per qualified account. This increase alone brings almost 75% of deposits in the United States under coverage. The expanded coverage remains in effect until December 31, 2009.

If you have more than $250,000 in cash, you don’t have to move it to another bank to get an additional $250,000 in coverage. Simply set up another account under a different ownership category (single, joint, IRA, revocable trust, corporation, etc.). For most banks, this can even be done online.

For those interested in insuring large deposits, up to $50 million, you might want to consider EverBank’s Insured Advantage Certificates of Deposit (CDARS)*.

Long Term Investment Goals: Should I Worry About Mutual Fund Companies Going Bankrupt?

No. We’re protected here, too. The Investment Act of 1940 requires each fund to be set up as an individual corporate entity, with a board of directors. That entity then hires the mutual fund company to manage its assets. So if the mutual fund company goes belly-up, its creditors can’t touch the fund’s assets. And the board of directors simply hires a new manager, after getting shareholder approval.

The only way your mutual fund can go bankrupt is if the actual value of all the stocks or bonds in the portfolio drop to zero.

Long Term Investment Goals: What if My Broker Goes Out of Business?

Again, we’re covered. Brokerage firms are restricted from co-mingling funds by SEC Rule 15c3-3 - the Customer Protection Rule. Or as they used to tell us at summer camp - boys are blue, girls are red. And we don’t want any purple running around here.

As the Financial Industry Regulatory Authority (FINRA) explains, “In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.”

But we all know that Wall Street doesn’t always abide by the rules. That’s where SIPC insurance comes in. Created in 1970 as a non-profit, non-government membership corporation, funded by member broker-dealers, the SIPC’s primary role is to return funds and securities to investors if the broker-dealer holding these assets becomes insolvent.

SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. But again, we can easily increase coverage by establishing multiple accounts under different ownership structures.

Good investing,

Lou

P.S. If you’re looking to put your money back to work, or if you’re looking for some ideas of what to do with your cash holdings, take a look at our Perpetual Income Portfolio. It’s yielding over 17% right now.

* Disclaimer: The publisher of Investment U maintains a marketing relationship with EverBank, but it’s important to note that we’d recommend their products and services anyway.

Louis Basenese 2008 Archives, Investment Strategies, Louis Basenese, The Truth About Investing future investing goals, long-term investment goals

Closed-End Income Funds: Why It’s Time to Buy Them

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
October 09, 2008: Issue #868

Pick a stock. Any stock. And invariably, one investor will argue it’s cheap. Another will say it’s expensive. Even in this panic-driven sell off. The problem, of course, is that no foolproof, infallible metric exists to determine who is right. Until it’s too late.

But the same is not true of closed-end income funds.

A first grader with a good grasp of addition and subtraction can tell whether one is cheap. Or expensive. Right now, they’re ridiculously cheap.

Since closed-end income funds issue a fixed number of shares, supply and demand determines market prices. That means it’s possible for such funds to trade at a price that’s greater than (a premium) or less than (a discount) the actual value of the securities in the portfolio (net asset value).

Average Closed-End Income Fund Discount

Currently, the average closed-end income fund is selling at a 13.7% discount. Almost double the average of three weeks ago, according to research firm Lipper. That means if the fund’s manager sold all of the fund’s holdings, investors would earn an instant 13.7% profit.

What’s more, almost 200 closed-end funds trade at more than a 20% discount. And more than 20 trade at discounts of 30% to 40%. Not to mention, many sport double-digit yields.

Have you ever complained about buying something at 40% off? Me either. And that’s the attitude we need to embrace when it comes to closed-end funds. We’re witnessing a once in a lifetime buying opportunity. But, don’t just take my word for it…

• “I’ve been in the industry for 25 years and I’ve never seen [discounts]… this wide,” declares Cecilia Gondor, Executive Vice President at Thomas J. Herzfeld Advisors Inc.
• “Discounts have gotten to levels perhaps never seen before, certainly not for years,” according to Jonathan Issac, Vice President at Eaton Vance Corp.
• “I’ve been through [market crises] six times in my 40-year career, and this is as nasty as I’ve seen it,” explains the President of Thomas Herzfeld Advisors.

A skeptical bent, especially in this market, doesn’t hurt…

Are Closed-End Income Fund Bargains Too Good to Be True?

Yet, when it comes to closed-end income funds, the bargains aren’t too good to be true. They’re a result of fearful investors. Not a breakdown in the underlying fundamentals.

You see, when investors are scared, they sell indiscriminately. Companies with stellar earning growth and fundamentals get tossed just as quickly as companies with terrible fundamentals.

If you have any doubt, consider that as of the close on October 6, 80% of the stocks in the Russell 3000 were down for the year. Obviously, not every one of those 2,400 stocks sports terrible fundamentals.

My point. Good stocks are getting thrown out with the bad. So, too, are many solid closed-end income funds. It’s especially true among the 400 or so income-based closed-end funds. Because investors are extremely leery of anything credit related, they’re selling income funds more aggressively.

For investors that value solid income (in some cases paid monthly), with the potential for double-digit appreciation, too, I’m convinced no better opportunity exists. Here’s why…

The widespread panic in the markets is doing more than sending discounts to the moon. It’s also depressing asset prices, leading to declines in the NAV. But remember, unlike stocks, fixed-income investments have a predetermined value at maturity.

So despite the wild swings, and even dips in NAV, valuations will recover as maturity draws near. Even better, so will the historic discounts.

The Premium/Discount History of Closed-End Income Funds

If you have any doubt, pull up the premium/discount history for any closed-end income fund with at least a five-year track record. You’ll notice, time and time again, that the fire sale prices don’t last.

By no means am I suggesting all the funds are immune to losses. No investments are. Not even money market funds.

Some closed-end income funds will inevitably pay the price for using too much leverage. Or overdosing on toxic fixed-income investments. But countless others will not.

Unfortunately, simple math won’t help us distinguish between the good and the bad. But it’s not an impossible task. I’m convinced you can single out some inevitable winners and enjoy steady double-digit yields and capital appreciation…

All you have to do is avoid the funds with the highest yields. Or the biggest discounts to NAV. Such extreme levels indicate higher risk. Whether it’s justified or not, it’s best to steer clear of these outliers.

And instead, focus on funds with slightly above average yields (9% to 12%) and discounts to NAV of 15% to 25%. At the same time, I’d focus on funds with…

• Less than 10% exposure to the “toxic” financial sector.
• A reasonable amount of leverage (up to 25%). Or none at all. This will minimize the impact of any poor investment choices.
• No investments in mortgage-backed securities. Or only agency mortgage-backed securities (the ones backed up by the full faith and credit of the government).
• A dividend that hasn’t been cut since the beginning of the credit crunch (August 2007). A dividend cut often confirms deterioration in the underlying assets.
• Minimal or no exposure to auction-rate securities. Funds relying on this type of financing remain hamstringed, as the auction-rate market is still not functioning properly.

These two websites - www.cefa.com and www.etfconnect.com - should help you find all the necessary information. (If you want to skip the hassle, here are the eight closed-end funds we highly recommend right now.)

In the end, we’ll look back at this period in amazement over the extraordinary buys available in closed-end income funds. The last thing I want is for your amazement to be soured with regret over not taking advantage of them.

Good investing,

Lou Basenese

Louis Basenese 2008 Archives, Louis Basenese, Mutual Funds Investing closed end funds, closed-end income funds

Wind Power: Why This Renewable Energy Could Solve The U.S. Oil Addiction

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, September 17, 2008: Issue #856

It’s become cliché to say that the United States is addicted to oil. I’ll make no effort to refute the claim because it’s true. It’s an expensive habit, too. The upshot, however, has been the explosion of interest in renewable energy sources. Last year, investors poured a record $71 billion into the alternative energy space. And billions more funnel in every day.

But with so many possibilities - hydropower, wind power, solar power, geothermal, biofuel, clean coal technology - investors are forced to pick which alternative energy source will distinguish itself as the most viable replacement for oil. It’s a crapshoot.

That is, until you realize the shooter (in this case Wall Street) is rolling a pair of “loaded” dice. In recent months, heavy hitters like The Blackstone Group, General Electric and T. Boone Pickens have stealthily invested billions into a single renewable energy source. JP Morgan Chase revealed that it’s holding a $1 billion stake in the very same investment.

Even better, in the next five years, the governments in the United States, China and Europe will plow at least $150 billion into the same alternative, according to CLSA Research.

And, unlike oil, there’s no possibility of it running out. So let’s take a closer look at this odds-on favorite to win the alternative energy derby.

And the Winner Is - Wind Power

Wind. It’s clean (wind power generates absolutely no greenhouse gases). It’s renewable. And it involves no production decline curve. Hence, 30 years from now we won’t be worrying about “Peak Wind” theories coming to fruition.

It also can’t be hoarded by power hungry cartels. In fact, enough of it exists to satisfy global demand seven times over, according to a Stanford University study. North Dakota alone has enough of it to meet 25% of U.S. demand.

But perhaps most importantly, it’s finally coming of age. Just consider:

• From 2000 to 2007, the size of the wind power industry increased fivefold.  
• Last year, records were shattered with $36 billion in total global wind investments with the United States leading the way with $9 billion. 
• In the next 10 years, the wind industry is expected to quadruple in size.

Hands down, wind is the fastest growing source of power. But can such growth continue?

Sure, the Department of Energy and countless other studies and industry experts say it will. But are they being realistic? Absolutely. And here’s why…

Wind Power Makes Economic Sense & Simply Works

First and foremost, wind power makes economic sense. If the price of oil drops to $50 a barrel (it won’t), the economics still work; even without government subsidies.

You see, wind can be used to generate electricity for 6 to 8.5 cents per kilowatt-hour.

For comparison’s sake, the cost of nuclear power runs about 15 cents per kilowatt-hour. Coal now costs north of 10 cents (without factoring in carbon capture and storage). And gas-fired power costs approximately 12 cents.

Keep in mind, too, that just a few years ago, wind costs rested north of 15 to 20 cents. But today, costs are low enough in some markets to compete with conventional power generation methods. And future advancements will make wind power even cheaper.

Look no further than Denmark. It already generates 20% of its electricity from wind. And Spain, Portugal and Germany boast similarly impressive penetration rates of roughly 12%, 10% and 7%, respectively.

The timing couldn’t be more perfect, either. While wind energy costs are dropping, costs for competing technologies - coal, nuclear and gas - are headed in the opposite direction.

Wind is the cost effective way our nation can start solving its oil addiction. And unlike many of the other far-fetched solutions to our energy needs …

Wind is realistically attainable.

Good investing,

Louis Basenese

Today’s Investment U Crib Sheet - Six Wind Picks…

• Even in our domestic market, some of the biggest players in wind power are companies based overseas. Because the United States has showed up late to the “wind power party,” many of the industry leaders are in Europe.Vestas Wind Systems (CPH: VWS)
  
  
  Suzlon Energy Limited (NSE: SUZLON)

   

   

  Clipper Windpower (LON: CWP)

   

   

  Babcock & Brown (ASX: BBW)

   

   

  GE Energy (NYSE: GE)

   

   

  Siemens AG (NYSE: SI)

   

   

  Some of the hottest wind companies in the United States still remain private, and many of the smaller companies producing wind power and equipment remain speculative investments because of their risk. Many of the biggest players in wind power - like GE - have large wind divisions within larger conglomerates. It makes finding “pure” wind investments tricky.

   

• For more investment ideas on renewables and the T. Boone Pickens Plan, find out how to supercharge your portfolio with natural gas and wind in Investment U Issue #837, The T. Boone Pickens Way: How To Supercharge Your Portfolio.

 

• Regardless of how we solve our energy problems, the solution will require large investments in energy and infrastructure. And the benefits for investors could be enormous. Find out why the energy sector is on sale, and why it shouldn’t stay that way for long in Investment U Issue #839, The Energy Sector: Another Solid Industry Goes “On Sale.”

Louis Basenese 2008 Archives, Alternative Investments Site Map, Louis Basenese alternative energy, wind power