Chinese Stocks: Why They’re Under Scrutiny

When you trade micro-cap stocks or small-cap stocks, there is added risk. And when you trade Chinese small-cap stocks, there is even more risk.

Just take a look at the media these days and you’ll find some small Chinese company making the news…but for the wrong reasons.

There has been a rise in discussions on the strategy of reverse mergers in the media. The speculation is that numerous small Chinese stocks debuting on the domestic exchanges (via reverse mergers) are currently being investigated for pump and dump schemes and questionable reporting practices on their statements.

Reverse mergers or takeovers occur when a private company that wants to go public finds a shell company that is trading and buys the shell. The private company then transfers its assets into the empty shell and, after some minor reporting, the company becomes public.

The advantage is that it is much easier to take over a shell company than it is to get listed via the traditional method. The reporting requirements are much less stringent in a reverse merger. This appears to have attracted numerous Chinese companies.

I’m not saying all of these Chinese reverse mergers should be the subject of investigation; but, as this strategy is the easiest method of listing on domestic exchanges, I’m not surprised to hear of wrongdoings in this area.

It appears that there’s a witch hunt on for these small Chinese companies, many of which are likely legit. Yet, we are seeing short sellers, bloggers, and anyone with access to writing on the Web posting negative reports on small Chinese companies.

China MediaExpress Holdings, Inc. (NASDAQ/CCME) saw its share price plummet by over 30% on surfacing news that the company would be the target of an investigation for a pump and dump scheme. The allegation is that the company, via a reverse merger, pumped up the positive news, driving up the stock price, and then dumped the stock for massive profits. Again, it’s only an allegation and is yet to be proven.

China Electric Motor, Inc. (NASDAQ/CELM) hit a wall on Thursday morning after announcing the delay of its 10K, Q4, and 2010 reports.

China Education Alliance, Inc. (NYSE/CEU) announced on Thursday that it would need to delay its earnings conference, but said it was not due to accounting issues. But you have to wonder…

China Century Dragon Media, Inc. (AMEX/CDM) is under investigation and could see delisting from AMEX.

FUQI International, Inc. (formerly NASDAQ/FUQI; now Pink Sheets/FUQI.PK) was delisted. It currently trades on the Pink Sheets.

Other Chinese companies subject to allegations include China Green Agriculture, Inc. (NYSE/CGA), China Agritech, Inc. (NASDAQ/CAGC), AutoChina International Limited (NASDAQ/AUTC), and China Valves Technology, Inc. (NASDAQ/CVVT).

I have covered many of these stocks based on what I believe were factual results and information. You cannot always differentiate the good information from bad. When a sole short seller attacks a company, you have to take a step back and wonder.

Worst yet is that we are seeing stock bloggers rip into companies, driving the stock down. When a sole blogger can drive a share price down, you come to understand the extreme nervousness in the market.

The way I see it is that we have to be careful here. There are some suspicious companies, but I feel that the majority of Chinese companies are legit, including some of those that formed via reverse mergers.

While there are problem companies, many of these Chinese stocks are unfairly being dumped upon. I suggest you take the opportunity to buy on weakness, unless there are numerous allegations against the company, especially from reputable sources. In these cases, AVOID.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Stocks Look to Go Higher, But Will Face Resistance

The first quarter is completed. For stocks, it was positive in spite of several bouts of volatility. The small-cap Russell 2000 finished the quarter tops, advancing over seven percent. Technology has also been showing some attraction in the recent weeks.

Now, as we move into the second quarter, the month of April has been the best performing month for the DOW, averaging two percent since 1950, according to the Stock Trader’s Almanac. A major reason for the buying in April is the positive anticipation of first-quarter earnings.

And whether it is penny stocks, micro-cap stocks, or S&P 500 companies, you have to be impressed by the sustainability of the positive sentiment. The real test now comes as stocks edge higher. We need to see a strong break higher or we risk a relapse.

The major stock indices have closed higher in eight of the last 10 sessions to Wednesday, but there is a red flag, as the associated trading volume continues to be light, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, you have to question the lack of mass market participation in the current rally.

The near-term signals have a positive bias, but you need to watch the overbought condition.

The sentiment in the market is bullish, as stocks continue on a nice two-year rally from the March-2009 low. The trend of the NYSE new-high/new-low (NHNL) has been edging higher, with 172 of the last 182 sessions bullish as of March 30. In the technology area, 128 of the last 140 sessions have been bullish. All the signs point to additional gains ahead.

As of March 30, about 81.33% of all U.S. stocks are above the 200-day moving average (MA), down slightly from 82.38% a month ago. For the shorter-term MAs, the monthly decline has been more significant. For instance, about 59.87% of U.S. stocks are above their 50-day MA, down from 69.76% a month ago. We could be seeing a pending market decline.

So, while the momentum points to additional gains, I feel somewhat nervous that there hasn’t yet been a correction of any significant magnitude, albeit there have been several down days of over one percent over the recent month. This is not to say stocks are overvalued, but I feel they are fairly valued based on the current economic and earnings metrics.

And, unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

I also believe in adopting strong risk management to protect your investments and hard-earned capital. Take some profits and use put options to hedge against a downside move.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Stocks Look to Go Higher, But Will Face Resistance

The first quarter is completed. For stocks, it was positive in spite of several bouts of volatility. The small-cap Russell 2000 finished the quarter tops, advancing over seven percent. Technology has also been showing some attraction in the recent weeks.

Now, as we move into the second quarter, the month of April has been the best performing month for the DOW, averaging two percent since 1950, according to the Stock Trader’s Almanac. A major reason for the buying in April is the positive anticipation of first-quarter earnings.

And whether it is penny stocks, micro-cap stocks, or S&P 500 companies, you have to be impressed by the sustainability of the positive sentiment. The real test now comes as stocks edge higher. We need to see a strong break higher or we risk a relapse.

The major stock indices have closed higher in eight of the last 10 sessions to Wednesday, but there is a red flag, as the associated trading volume continues to be light, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, you have to question the lack of mass market participation in the current rally.

The near-term signals have a positive bias, but you need to watch the overbought condition.

The sentiment in the market is bullish, as stocks continue on a nice two-year rally from the March-2009 low. The trend of the NYSE new-high/new-low (NHNL) has been edging higher, with 172 of the last 182 sessions bullish as of March 30. In the technology area, 128 of the last 140 sessions have been bullish. All the signs point to additional gains ahead.

As of March 30, about 81.33% of all U.S. stocks are above the 200-day moving average (MA), down slightly from 82.38% a month ago. For the shorter-term MAs, the monthly decline has been more significant. For instance, about 59.87% of U.S. stocks are above their 50-day MA, down from 69.76% a month ago. We could be seeing a pending market decline.

So, while the momentum points to additional gains, I feel somewhat nervous that there hasn’t yet been a correction of any significant magnitude, albeit there have been several down days of over one percent over the recent month. This is not to say stocks are overvalued, but I feel they are fairly valued based on the current economic and earnings metrics.

And, unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

I also believe in adopting strong risk management to protect your investments and hard-earned capital. Take some profits and use put options to hedge against a downside move.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Retail Stocks: Why I’m So Picky About Them

I’m extremely picky when looking at the retail sector. In fact, the majority of investment newsletters suggest avoiding retail stocks. And while I’m not totally in agreement with that view, I would be more selective with stock picking in the retail sector.

The stats don’t lie. Retail sales in the U.S. are estimated to come in at $389.65 billion in March, compared to $344.24 billion in January, according to The Financial Forecast Center. But here is the problem: retail sales are predicted to slide to $343.09 billion by September 2011.

These are not necessarily readings you can get excited about. There continue to be mixed readings. Retail sales excluding autos grew at 0.7% in February, just above the 0.6% estimate. This is encouraging, but, in my view, the key is to look for same-store sales growth in retailers that sell non-essential goods or what are known as durable goods. Increases here show that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

The uncertainty was clearly reflected in the recent weak Durable Goods reading, which was a disappointment and in my view worrisome. Non-discretionary spending remains a problem. Durable Goods orders were disappointing, with a decline of 0.9% in February, lower than the expected increase of 1.1%. Excluding the transportation element, the negative 0.6% reading was well below the 1.8% increase that was estimated.

In my view, the readings clearly indicate the continued reluctance by consumers to spend on non-essential big-ticket items, and this is bearish

Electronics retailer Best Buy Co. Inc. (NYSE/BBY, $29.55) plummeted over five percent last Friday after delivering weak results. The company blamed lower demand for flat-screen televisions.

Overall, I’m disappointed with the Durable Goods results, which in my view continue to indicate weak demand for non-essential goods and services. Again, until we see sustained improvement in jobs and housing, there will likely continue to be problems arising,

Consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage and not worry about losing their jobs and missing payments. We are seeing some improvements in the jobs area, but unemployment remains high at 8.9%. Until we see greater improvement, I question how confident homebuyers will be.

At the end of the day, we need to see the willingness to spend and not worry about money. Only under this scenario will there be sustained spending.

Given the current problems, consumer spending will likely to continue to be soft, which will impact the growth of gross domestic product.

If you are buying retail, stick with the discounters, dollar stores, and big-box operations.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Great News for the Bank Stocks; But Why I Won’t Buy Them

The big U.S. banks must be ecstatic.

After 100 people at the Federal Reserve ended their review of major U.S. banks, the Fed concluded that some of the largest banks in this country could increase their dividends, buy back shares and repay government loans.

JPMorgan Chase & Co. (NYSE/JPM), Wells Fargo & Company (NYSE/WFC) and State Street Corporation (NYSE/STT) wasted no time in announcing dividend increases for the benefit of their “patient” shareholders. JPMorgan was the most aggressive, raising its quarterly dividend payout to $0.25 a share from $0.05 a share and authorizing a $15.0-billion stock repurchase program.

Since the credit crisis hit, there have been over 300 bank failures in the U.S. The Federal Reserve put the country’s 19 largest banks on a short leash. The Fed is not loosening its hold on the biggest banks by giving them the permission to increase their dividends and start stock buyback programs again. These approvals are only granted for 2011 and dividends to shareholders are limited to 30% of earnings.

Despite all this good news, which I believe the stock market had already discounted some months ago, I would not be a buyer of the big bank stocks at this time. Why?

Simply because we are not out of the woods yet with the economy. I wrote yesterday morning about the pathetic U.S. housing market and how I believe housing prices will drop another 5.0% to 7.5% this year.

Yesterday afternoon, the U.S. Commerce Department announced that new-homes sales plunged in February to the fewest on record. New-home sales fell 17% in February. The year 2010 was the fifth consecutive year of decline for new-home sales in America.

Wells Fargo and Bank of America (NYSE/BAC) still have tremendous exposure to the crippled housing market. We are not talking thousands of foreclosed-upon homes; we are talking millions of them.

Banks like JPMorgan have far fewer ties to the housing market, but they have substantial exposure to the stock market, where the bear market rally that started in March 2009 is getting tired amid looming increases in long-term interest rates.

My simple stock market advice regarding the bank stocks: be wary of them at this point in the economic recovery; the second shoe could drop anytime.

Michael’s Personal Notes: 

According to the National Inflation Association (NIA), under its QE2 program, the Federal Reserve is buying 70% of U.S. Treasuries, as foreign buying of our debt has fallen off drastically.

In a recent report entitled U.S. Dollar Collapse Could Occur at Any Time, the NIA asks, “…if in the unlikely event there is no QE3, who will fill in for the additional buying demand currently coming from the Federal Reserve? After all, with no QE3, the Federal Reserve will go from buying 70% of treasury bonds to being a seller of U.S. Treasuries.”

At the end of the most recent Federal Open Market Committee meeting, the Federal Reserve signaled that it would be unlikely to expand its $600-billion bond purchase program as the economy improves.

I’ve been of the opinion that there would not only be a QE2, but also a QE3 and QE4, as the Fed has become the buyer of last resort for U.S. debt. If in fact the Fed does not continue its buying of U.S. Treasuries, then we will see long-term interest rates rise.

Where the Market Stands; Where it’s Headed:

Market veterans like me review several indicators to determine the direction of stock prices. In general, we look at sentiment indicators, technical and fundamental indicators, economic, fiscal, and monetary indicators.

It’s no coincidence that the bear market rally was born the same month (March 2009) that the Federal Reserve made a pledge to maintain interest rates “exceptionally low” for an “extended period” of time. The Federal Funds Rate has been pegged at between zero and one-quarter percent since December 2008—an unprecedented 29 months of interest rates being ultra-low. How can stocks not go up in such a favorable monetary environment?

The bear market rally in stocks is alive and well.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi, PROFIT CONFIDENTIAL, September 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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Stocks Of Potassium Iodide Exhausted In U.S.

Health websites sold out, readers struggle to find radiation-fighting pills anywhere. ~ Video

We are getting numerous reports from readers that stocks of potassium iodide, which is used to protect the body against the effects of nuclear fallout, are completely sold out across the United States. Checks of health supplement websites in the U.S. also confirmed that stocks are completely exhausted.

With the threat of radioactive particles from the stricken Fukushima nuclear reactor complex drifting towards the United States on prevailing easterly winds, many Americans are attempting to protect themselves by acquiring potassium iodide, which protects the thyroid gland from radiation and cancer caused by radioactive iodine.

U.S. manufacturers of potassium iodide have been swamped with demand, reports CNN. One Williamsburg, Virginia-based company “Has received hundreds, if not thousands, of calls from potential buyers in Asia as well as repeat U.S. customers suddenly seeking to replenish their stockpiles of the drug.”

The U.S. government has said that it will not stockpile any further supplies of potassium iodide, which has only increased demand from Americans who are struggling to find it anywhere.

“The federal government has never purchased enough to meet that standard. There is currently only enough of the medication available for populations living within 10 miles of nuclear reactors in the United States, according to U.S. officials,” an amount Alan Morris, president of Anbex Inc, slams as being completely insufficient.

Morris points to the fact that the fallout from the April 1986 Chernobyl disaster, which was spread all around the northern hemisphere, led to over a million deaths because of radiation poisoning according to some estimates, causing thyroid cancer in children living in surrounding countries.

“U.S. drug stores are reporting a sudden increase in sales of over-the-counter anti-radiation pills, despite assurances from health officials that Americans are not at risk from Japanese nuclear reactors,” reports Fox News.

Some less than ethical private retailers are exploiting the shortages to charge nearly $300 for one pack of tablets, which normally retail at around the $15 level.

It is important to stress that high-strength potassium iodide of the 130 mg variety shown in the image above should only be taken in a nuclear fallout emergency and not under any other circumstances.

Watch a video simulation of how the Chernobyl radiation cloud affected the whole of Europe, causing governments to severely restrict cattle movements and food safety standards as far away as England and Wales.

Good Luck finding any Potassium Iodide in the United States! Went on the internet and contacted all manufacturers, suppliers, health food stores, etc. NO ONE HAS ANY!

Just says temporarily out of stock on all websites…..What little was available is gone and the earliest they expect it is sometime possibly next month or the following month! Iosat manufactured and distributed by Anbex Inc. doesn’t even have it available.Good God… how would we get it if we needed it now?

Think the Government is going to help get it to us? Don’t think so! No one is saying anything about this little problem!

Paul Joseph Watson - March 15, 2011 - posted at SovereignIndependent

Submitted by SadInAmerica on Sat, 03/26/2011 - 10:34pm.

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Silver Stocks Rally

The broad market took a kick in the teeth on the news of a bombing in Israel, but the silver stocks I follow are up – strongly.  So glad I added two silver picks to the Red-Hot Global Resources portfolio yesterday.

Why are silver miners doing so well? Because silver is doing so well.  Look at this chart of the iShares Silver Trust (SLV: 36.47 +0.9325 +2.62%), which holds physical silver …

The Israel bus bombing pushed the US dollar higher today on a flight-to-safety play (it was also oversold) but gold and silver both are heading higher today.  Hmm …

Tagged as: silver, slv

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Three Reasons Why Stocks Will Continue to Rise in the Immediate Term

While macro economic analysis issues such as reduced interest rates and a declining U.S. dollar have positive effects on the stock market, there is a direct correlation in the stock market to its trading direction and the value of the stocks that trade in the market.

Here are three reasons why stocks will continue to advance in the immediate term.

Profit margins of the S&P 500 non-financial companies are expected to rise 8.9% in 2011, their highest level in 18 years (Bloomberg survey, 3/14/11).

Stocks rise as their profits rise. With interest rates at record lows, real estate prices still trying to find a bottom, bond buyers weary of higher interest rates in 2011, and gold still not accepted by general investors as an investment, stocks remain the only viable alternative for investors. As public companies continue to increase their profits, their stock prices will rise.

The S&P 500 companies are sitting on their biggest hoard of cash ever—close to $1.0 trillion.

Cash insulates companies from economic downturns, while providing them with money to make acquisitions and to buy back their own stock—both exercises resulting in less stock in the marketplace. Less supply of stock, even if demand remains unchanged, results in the stock market moving higher.

Dividends are set to rise as corporate profits spur bigger payouts to investors.

Rising dividends make stocks more attractive to investors. The highest profit margins in 18 years will see corporate profits returned to investors in the form of dividends.

In respect to interest rates, a 100-basis-point rise in long-term rates will have a major negative impact on the bond market. For the cash-rich S&P 500 companies, a 100-basis-point rise in interest rates will not have much of an impact on earnings. In fact, I believe the stock market has already discounted a full percentage point increase in interest rates.

Michael’s Personal Notes:

For my gold bug readers, and those investors investing in gold, here’s a short recent history on gold bullion:

1900 – The U.S. adopts the gold standard via the passage of the Gold Standard Act.

1913 – The U.S. Federal Reserve requires all money issued by the Reserve to be 40% backed by gold.

1933 – Start of the Depression; Roosevelt prohibits private holdings of gold bullion and gold coins.

1944 – Bretton Wood agreement established. U.S. dollar needs to maintain a gold coverage of $35.00 to on ounce of gold.

1971-1973 – The U.S. devalues the dollar and raises the official selling price of gold to $42.22 per ounce. Currencies start to float freely without a specific tie to gold.

1975 – Americans allowed to own gold coins and bullion for first time since 1933.

1976-1979 – The International Monetary Fund does away with the official price of gold. Governments allowed to trade freely in gold.

1980 – Gold reaches $875.00 per ounce.

1999 – Euro is introduced as a currency; 15% backed by gold.

2001 – Central banks return to buying gold for the first time in 20 years.

2015-2020 – World inflation and a collapse in the value of the U.S. dollar over the past decade causes gold to trade between $2,500 and $3,000 an ounce. (This one’s a Michael Lombardi prediction.)

Going way back…

1091 B.C. – Gold becomes a form of money in China in the form of squares.

560 B.C. – First gold coins minted in Turkey.

58 B.C. – Julius Caesar’s conquests of other countries are enough to pay off Rome’s debt. How will the U.S., with the world’s biggest national debt, pay off its debt?

(Source, except for Michael’s prediction: The Ages of Gold, National Mining Association, World Gold Council, 2007.)

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 3.8% for 2011. My opinion is that, through thick and thin, we have been in a bear market since March 2009 has served me well, and I continue with that belief.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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Long Oil, Short Stocks!

“Go long oil, short stocks!” is what we advised subscribers to do on Friday, with Col. Qaddafy declaring a cease-fire and Japan laboring heroically to contain the menace of contamination from damaged spent-fuel rods. Sketchy news concerning a Libyan truce had caused crude-oil quotes to recede somewhat from their frenzied peaks, but we could think of no convincing reason why Kadhafy would actually stand down.  On the contrary, we assumed that he was stalling in order to consolidate gains on the ground before the “international coalition,” whoever they might be, enforced a no-fly zone.  This they did over the weekend — with France, of all countries, spearheading the attack from the air. It’s hard to imagine what the “coalition” has in mind — other, perhaps, than cutting the rebels a little slack. But a little slack is as much as they’re likely to get, since it seems doubtful the allies will commit the ground troops needed to shut down Qaddafy’s offensive. 

In admonishing subscribers to “Buy crude!” we asserted that the “international coalition” may have made the mistake of boxing in a ruthless and paranoid dictator.  Notice that we did not call him a ruthless, paranoid and unpredictable dictator.  For not even the U.S. State Department, never mind the military brass, could expect Col, Qaddafi to simply roll over, running up the white flag and effectively ceding control of Libya’s oil fields to such worthies as France, the U.S. and whoever else signed on to the weekend air sorties. Far more likely, in our estimation, is that Qaddafi would sabotage Libya’s oil capacity before he’d turn it over to the West. What’s to stop him?  We surely don’t envision French troops on the ground, hanging tough with the rebels. And that is why we asserted on Friday that anyone who went home short crude oil futures would get what they deserved come Monday morning.  Actually, as of Sunday night, the May contract was up more than $2 and looking feisty enough to go even higher. 

The ‘Wrong’ Catastrophe 

Concerning part two of our recommendation – “Short stocks!” – gratification could be a little longer in coming.  We were bearish on stocks not because we feared a catastrophic nuclear meltdown; indeed, as a highly technical article that we linked at Rick’s Picks last week explained, the Fukushima reactors were all shut down at the time of the earthquake, effectively limiting the amount of any damage that could occur.  No, what concerned us most was not radioactive fallout, but economic fallout caused by the crippling of the world’s most important just-in-time producer. Auto-parts users around the world, for one, are already feeling the strain of Japan’s outage; however, shortages in many other key areas of global production are bound to be felt, and soon.  

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This developing story has been underplayed so far, but it seems inevitable that Japan’s economic slowdown will negatively impact a global economy that was already skirting depression.  Why have the news media emphasized the nuclear scare-story over the perhaps even scarier economic one?  On that question, we defer to our colleague  Bill Buckler, publisher of The Privateer. He notes that the one asset class that has benefited from nuclear-disaster talk is U.S Treasury paper, which the contemptible idiots who bring us the news each day persist in calling a “safe haven” – the safest of havens, actually.  Yeah, right.  With the U.S. Treasury already $14.3 trillion in the hole, Congress has throttled back on spending to the tune of about $3 billion. If you believe in the tooth fair, then every U.S. bond- and note-holder is going to get paid.  For our part, we’ll cast our lot with PIMCO, which recently bailed out of Treasurys as “too risky.”  

Moody’s a ‘Useful Idiot’ 

That is notwithstanding the fact that the U.S. has the unquestioning help of some useful idiots in sustaining a brazen fraud that ranks U.S. Treasury paper as the absolute safest of safe havens. There is Moody’s, for one, which can always be counted on to downgrade Europe’s sovereign paper whenever investor scrutiny might otherwise fall on U.S. debt. And there’s also G-7, ever eager to dig itself in deeper to protect the mountain of bogus U.S. paper its members hold. Most recently, they helped Geithner throw everything they could at the yen to hold it down. Indeed, if the short-squeeze on yen carry-traders had grown any more intense than it did last week, it would have forced a massive unwinding out of Treasurys, derivatives and everything else that banking’s feather merchants have bought using yen borrowed for next to nothing. 

The epic folly that sustains this hoax could last for yet a while longer. However, we are convinced of one thing:  It cannot last forever.  

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

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Stocks: Why I Bought in Yesterday

If you’ve been reading my market musings for years, you know how I love to buy when others are selling and sell when others are buying…a true contrarian at heart. Yesterday was no exception for me.

I’m an early riser. 5:30 a.m. at the office is my gig, so I get PROFIT CONFIDENTIAL in my readers’ hands as early as possible each day. And when I arrived Tuesday at work to see a sea of red ink across North American stock market futures, I saw more opportunity than risk.

A quick review of the various Dow Jones Industrial Indices as the market opened revealed what I expected: Dow Jones Oil & Gas Index down 5.1% (tensions in the Middle East easing, demand for oil in Japan falling) and the Dow Jones Insurance Index down 4.65% (exposure to Japan-related insurance claims). General Electric Company (NYSE/GE) was down about three percent on fears that its nuclear-related revenue might be affected (worth about $1.0 billion a year to GE).

But the Dow Jones Consumer Goods Index, Basic Materials Index, and Consumer Goods Index were holding their own. You know where I’m going with this: I believe that the markets overreacted to the troubles in Japan. And I see market overreaction as an opportunity.

As my colleague Robert Appel pointed out to me in an e-mail yesterday, “While nothing about this (Japan nuclear reactor) situation is remotely good news, let’s remember that, for a considerable time in the last century, both the U.S. and France detonated an entire series of nuclear bombs (tests) above-ground, releasing far more radiation at that time than is likely to arise from this situation.”

And, to answer your question as to what I found attractive on the markets yesterday: I bought gold-related investments. I see a $30.00-per-ounce drop in the price of gold (which happened on Tuesday) as too much of a temptation for this investor to ignore. Sure, I may be wrong. The damage in the markets may continue. But being the gold bug that I am, I’d just be back in buying more gold-related investments again if the price continues to weaken.

Michael’s Personal Notes:

On the topic of gold, some facts my readers will find interesting…

The value of all the world gold sales in 2010 was $200 billion, only equal to about the value of Microsoft.

The official U.S. price for gold bullion is $42.22 per ounce, established back in 1973.

If we take inflation into consideration, the price of gold would need to reach $2,000 per ounce to be at a new record inflation-adjusted high.

In 1979, the price of gold jumped 135%. In 1981, the price of gold fell 32%. Over the past 10 years, we have gotten nowhere near to a 135% annual jump in the price of gold. In fact, 2010 was the best year gold had in 31 years, up 30% last year.

Accumulation of gold over the past decade has been slow and steady, hence why I do not expect a bust. Busts in commodity or investment prices happen after investor euphoria in an asset class takes hold. With gold, we are nowhere near the investor euphoria we had with tech stocks in 1998-1999 or U.S. housing in 2003-2005.

Where the Market Stands; Where It’s Headed:

Despite the next few days of trading being very important in determining whether a new trend is upon us, I do not believe that the bear market rally in stocks that started in March of 2009 is over yet.

The Dow Jones Industrial Average opens today up 2.4% for 2011.

Michael’s Personal Notes:

“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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Panic Buying: Stocks Of Potassium Iodide Exhausted In U.S.

Paul Joseph Watson
Infowars.com
March 15, 2011

We are getting numerous reports from readers that stocks of potassium iodide, which is used to protect the body against the effects of nuclear fallout, are completely sold out across the United States. Checks of health supplement websites in the U.S. also confirmed that stocks are completely exhausted.

With the threat of radioactive particles from the stricken Fukushima nuclear reactor complex drifting towards the United States on prevailing easterly winds, many Americans are attempting to protect themselves by acquiring potassium iodide, which protects the thyroid gland from radiation and cancer caused by radioactive iodine.

U.S. manufacturers of potassium iodide have been swamped with demand, reports CNN. One Williamsburg, Virginia-based company “Has received hundreds, if not thousands, of calls from potential buyers in Asia as well as repeat U.S. customers suddenly seeking to replenish their stockpiles of the drug.”

A d v e r t i s e m e n t

The U.S. government has said that it will not stockpile any further supplies of potassium iodide, which has only increased demand from Americans who are struggling to find it anywhere.

“The federal government has never purchased enough to meet that standard. There is currently only enough of the medication available for populations living within 10 miles of nuclear reactors in the United States, according to U.S. officials,” an amount Alan Morris, president of Anbex Inc, slams as being completely insufficient.

Morris points to the fact that the fallout from the April 1986 Chernobyl disaster, which was spread all around the northern hemisphere, led to over a million deaths because of radiation poisoning according to some estimates, causing thyroid cancer in children living in surrounding countries.

“U.S. drug stores are reporting a sudden increase in sales of over-the-counter anti-radiation pills, despite assurances from health officials that Americans are not at risk from Japanese nuclear reactors,” reports Fox News.

Some less than ethical private retailers are exploiting the shortages to charge nearly $300 for one pack of tablets, which normally retail at around the $15 level.

It is important to stress that high-strength potassium iodide of the 130 mg variety shown in the image above should only be taken in a nuclear fallout emergency and not under any other circumstances.

Watch a video simulation of how the Chernobyl radiation cloud affected the whole of Europe, causing governments to severely restrict cattle movements and food safety standards as far away as England and Wales.

Stock up with Fresh Food that lasts with eFoodsDirect (Ad)

Here are a couple of emails we received today;

I went to the Whole Foods Market in Arlington, Texas last night to get a bottle of kelp and they were out and totally out of potassium iodide. They would not get a shipment, if any, by this Friday.

Are people in this area more aware of what is going on in Japan than the people in Austin? I hope so.

Respectfully,

Doug

——————————-

Good Luck finding any Potassium Iodide in the United States! Went on the internet and contacted all manufacturers, suppliers, health food stores, etc. NO ONE HAS ANY!

Just says temporarily out of stock on all websites…..What little was available is gone and the earliest they expect it is sometime possibly next month or the following month! Iosat manufactured and distributed by Anbex Inc. doesn’t even have it available.Good God… how would we get it if we needed it now?

Think the Government is going to help get it to us? Don’t think so! No one is saying anything about this little problem!

Elaine

—

Paul Joseph Watson is the editor and writer for Prison Planet.com. He is the author of Order Out Of Chaos. Watson is also a fill-in host for The Alex Jones Show.

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Euro/Dollar Spread: Bad News for Stocks and Commodities?

The power of the pattern is suggesting a Dollar rally and a Euro decline.

In the past this has often foreshadowed lower stock and commodity prices.

If the pattern is correct, look how vulnerable commodities are in the CRB/FCX chart!

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How many dividend stocks to own in your passive income portfolio?

It’s a common question and there is no way to answer it perfectly. Why? Because you could probably bring 10 different “experts” and they would all come up with different answers. There is no perfect answer but it’s a question that I get so often that I thought it’d be interesting to at least give my point of view. Let’s start with the basics.

-Having less stocks also means less trading fees
-The more companies you have in your portfolio, the more difficult it becomes to track them

-To smooth the passive income (adding companies makes dividend changes for one company less visible)
-To not depend on a specific sector or company too much (imagine having only a few financial companies during the most recent credit crunch)

So what does it become? It’s basically a balancing act where each person would have a different “middle point”. The number of stocks would generally depend on:

-Your ability to tolerate volatility
-The size of your passive income portfolio (for example, I have written about starting a dividend portfolio with $5000… do not spread such an amount over 10-15 stocks).
-The amount of time you want to spend researching these stocks
-The turnover you wish to have (are you a buy & hold or do you rotate often?)

It’s not necessarily set in stone, but here are my basic guidelines depending on the size of the portfolio:

Portfolio Size#Dividend stocks

As you can see, the number of stocks, at least for me, does not vary that much. Once I reach a passive income of $100,000 or so, I would generally keep the same number of stocks. Why? Because tracking and finding 25 winning dividend stocks is more than enough for me. It does give me comfort knowing that a 10% drop in any one of these stocks results in about a 0.4% loss for my portfolio which is very sustainable. I would from time to time change these 25 stocks obviously but trying to do too much reallocation can end up costing too much both in terms of trading costs but also the return. Why? Because chasing returns has always been shown as a losing strategy. You go with stocks that you believe in and that have strong fundamentals, not the stocks that have done the best in the past 12-24 months because those are very likely to not be the best performers in the next 12-24 months.

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Guest Post: The Coming Rout (In Stocks, Bonds, Commodities and Precious Metals)

The following article has been contributed by market analyst and contrarian thinker Chris Martenson.

Editor’s Note: As stock markets, commodities, and precious metals heat up due to a variety of factors, including excessive quantitative easing and stimulus, Chris Martenson warns that prices may be set to collapse. For years we’ve maintained that the longer-term trend for essential goods like food, energy, gold and silver will be higher prices, as central banks the world over, starting with our very own Federal Reserve, continue to intervene in the free market by printing more and more money to stimulate and stabilize the economy. So too have we warned economic crisis and confusion lead to extreme global volatility, not just in financial markets, but geo-politics. As food costs go through the roof, oil approaches $150 a barrel, and gold reaches new historic highs, caution is called for.

If there’s one thing we should have learned over the last few years, it’s that the consensus is usually well behind the curve, and when everybody believes the same thing is going to happen (in this case, continued rising prices), the exact opposite takes place. If you own a 401k or IRA with stocks, bonds and commodities, we suggest you consider Chris Martenson’s views on what we may see in financial markets in the near term.

As we did in the summer of 2008, we may now be approaching another breaking point. And as we saw in 2008, nothing but the US dollar was spared. Does this mean you should immediately sell all of your precious metals and other safe haven assets? Chris Martenson suggests not, especially if you’ve planned to hold those asset for a long investment horizon of years as opposed to months. Nonetheless, given what has transpired so far, it is important to understand that nothing is outside the realm of possibility. We urge our readers to remain vigilant, and if Mr. Martenson is correct in his forecast, there may be yet another great opportunity for investment and preparedness, especially in precious metals, in the very near future. If the ‘S’ hits the fan within global asset prices, we shouldn’t be surprised. Rather, we should embrace the opportunity, as it may not last long, especially in investments that have historically been the assets of last resort, such as commodities and precious metals. If Mr. Martenson’s forecasted scenario were to play out, we strongly believe that governments will act immediately, in unison, and without restriction to flood the economic system with yet more monetary stimulus.

The Coming Rout
By Chris Martenson

There’s a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%.  The trigger will be the cessation of QE II and a multi-month pause before QE III.

This is a reversal in my thinking from the outright inflationary ‘buy with both hands’ bent that I have held for the past two years.  Even though it’s quite a speculative analysis at this early stage, it is a possibility that we must consider.

Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals.  The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.

But over the next 3-6 months, I have a few specific concerns.

It’s time to build on the idea I planted in the Insider article entitled Blame the Victim (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.

Here’s what I said:

How I read [the Fed's recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can — with words — to soothe the situation. Perhaps China is making noises, or perhaps Brazil’s finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.

The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.

At the time, I speculated that all of the Fed’s pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating.  And I worried about what would happen if the Fed were to end the QE program in June.

Let’s just say it won’t be pretty.

Everything would tank.  Stocks, bonds, and commodities.  All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains.  Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices.  So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.

The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation.  I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.

The basic idea is this:  The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010.  The markets, all of them, are higher than they would be without this money.  $4 billion per trading day is an enormous amount of money.  It’s gigantic by historical standards.  As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.

Hello, downdraft.

The markets are quite substantially elevated due to the efforts of the Fed.  T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.

It’s really that simple.

To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.

First, on March 2, 2011 Bernanke said this:

Bernanke Signals No Rush to Tighten When Asset-Buying Ends

March 2, 2011

Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.

A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.

The “no rush to tighten credit” statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.

Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it’s a safe bet that market interest rates will rise.  Bernanke is at least on record as saying that if this happens, it won’t be because the Fed has taken the lead.

Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system.  It’s a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.

Then on March 5th, a much stronger and clearer signal was given, confirming my worries:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

March 4, 2011

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Whoa.  This is important news.  Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed.  This will change everything.

The old saying ‘sell in May and go away’ might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.

For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects.  But so far they’ve either spoken in code to reveal their displeasure or quietly resigned.  So we’re pretty sure there’s an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.

Of course, there’s some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between ‘stocks and flows’ (from the same article as above):

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of “stocks over flows” is somewhat troubling to me.  MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience.  Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like ‘stocks and flows.’

I’ll go even further. I’ll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government — which, it should be noted, will still be with us each and every month long after June 2011.  Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.

Who will buy all the Treasury bonds after the Fed steps aside?  That is unclear.  If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found.  Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program.  When that’s over, pressure will be reduced and yields will rise.

So what to do? For those concerned enough about this possible scenario to consider taking action, please see Part II of this article (free executive summary; paid enrollment required to access). In it, I predict the extent to which stocks, commodities, Treasury bonds and precious metals prices may be impacted in the near term.  I also detail the key indicators to look out for in order to determine if and when this scenario is unfolding - as well as recommended strategies to preserve capital during this corrective phase.

Chris Martenson is the father of three young children; author; obsessive financial observer; trained as a scientist; experienced in business; has made profound changes in his lifestyle because of what he sees coming.

As we did in the summer of 2008, we may now be approaching another breaking point.

Author: Contributing Author
Date: March 8th, 2011
Visit the Author's Website: http://

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Buying Japanese Stocks as the Economic Slump Continues

03/08/11 Baltimore, Maryland – Nothing much to report from the markets yesterday. The Dow was down 79 points. Gold rose $5.

So, let’s look across the wide Pacific…to the land that invented suicide bombing. Did we update you on our “Trade of the Decade”? We did? We thought so…

And here’s our old friend Marc Faber…with the same idea (or at least half of it.) Buy Japanese stocks, he says…

After a two-decade bear market, now is the time to buy and hold Japanese stocks, Marc Faber, publisher of the Gloom, Boom & Doom report, said.

Faber, who is credited with predicting the 1987 stock market crash and said two years ago that shares would decline just as they began the biggest rally in more than 50 years, said the Japanese government will be forced to print money to monetize the country’s public debt, the developed world’s biggest. That will cause the yen to weaken, helping boost earnings for the nation’s exporters and buoying stock prices.

Faber joins other bullish investors on Japan, such as Goldman Sachs Group Inc. and David Herro of Oakmark International Fund, in countering skepticism about Japan earned through four recessions and dismal stock returns after the 1990 crash of the bubble economy. The Nikkei 225 (NKY) Stock Average has fallen about 73 percent since it peaked in December 1989.

“If I had to make a bet for the next ten years in terms of equity markets, I would seriously consider a very strong weighting here in Japan,” Faber said yesterday at the CLSA Asia-Pacific Markets’ annual conference in Tokyo. “Once the debt market starts to go down, the yen will begin to weaken and that will lift equity prices. I would buy equities at the present time.”

But wait. What’s this?

Here’s Dennis Gartman with a nuance:

Japan is demographically and fiscally doomed. Her population is collapsing in size and growing elderly at the same time, while her fiscal circumstances are far and away the worst of the industrialized world. Japan has survived for decades in a strange world of fiscal irresponsibility by being able to sell her debt to her own people rather than to the rest of the world as the US can do and must.

Of course, this just supports our position. The Japanese soon will have a bitter choice. Either they abandon their whole silly economic model – with its eternal stimulus budgets and its perpetual zero interest rates. Or they print money. If they give up, it will bring on the final and devastating bottom of their 21-year slump. If they print money, on the other hand…they might hold off the disaster long enough to make it worse.

It is a bit like their situation after the Battle of Midway. Had they examined their situation carefully, they would have seen that the gods of war had gone over to the over side. They faced a superior adversary. And they were out of fuel. They needed control of the seas in order to re-supply; and they had just lost it.

What to do? They had a choice. They could have pulled back to the home island, begged forgiveness and negotiated a settlement. Instead, they soldiered on…in a long, hard, nasty retreat…and eventually turned to kamikaze pilots to try to save the day.

What choice will they make this time? Probably, they’ll print money. Inflation rates will rise. Japanese government bonds will collapse. And investors will try to protect themselves from inflation by buying stocks.

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning . 

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Bargains abound in big pharma stocks …

About a month ago I told you about some of my favorite sectors for income right now, and healthcare was one of them. Today I want to drill down a little further and talk about a specific industry within that group — the major pharmaceutical firms.

Right now, a lot of investors are asking themselves:

Are Drug Stocks a Prescription for
Higher Income or a Recipe for Disaster?

I don’t want to leave you guessing as to my answer. I think that, despite the challenges, many big pharma stocks are great values right now … especially if you’re the kind of person who likes fat dividend payments.

But before I get into the positives, let’s first talk about the problems these companies face.

Patent expirations are clearly the biggest hurdle right now.

For at least a few years now, the world’s major pharmaceutical companies have been dreading an impending sea of blockbuster drugs losing their patent protection. And this is a major reason that the group has been struggling to gain investor favor.

Worse, 2011 is the year that many fears become reality. Pfizer is losing three patents worth annual sales of at least $13 billion. Lilly and Novartis will each say goodbye to single patents each worth $5 billion a year. And other companies are in similar boats.

Obviously, big pharma isn’t sitting around twiddling its thumbs: Researchers are working frantically to discover new compounds and get them through clinical trials.

But there have been setbacks there, too: All told, the Food and Drug Administration issue about 20 percent fewer approvals in 2010 than in 2009 or 2008.

Worse, some of the FDA’s latest rulings have been downright perplexing. Consider the case of Tarceva, which was being jointly developed by OSI Pharmaceuticals and Genentech. The FDA’s advisory panel voted 12-1 AGAINST the drug … yet the organization approved it anyway. Then, in a separate case, the FDA rejected a drug (Esbriet) even though the panel was in favor of approval.

These mixed messages aren’t just frustrating (and costly) to the companies involved. They create further uncertainty for anyone investing in the industry. No longer does a positive FDA panel equate to a forthcoming product on the market!

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Speaking of regulators and lawmakers, there is also massive uncertainty surrounding broad-based government actions related to the health care sector.

In the U.S. we have President Obama’s reform measures — which threaten to crimp profits from prescription drug sales. Meanwhile, Europe’s fiscal woes are causing countries to revisit their own healthcare budgets.

The end result could be new limits on how much drug makers can charge for their products in these markets, as well as other legislative measures aimed at steering consumers toward cheaper alternatives. And it’s important to note that Europe alone accounts for roughly 30 percent of worldwide drug sales.

However, Big Pharma Will Solve these Problems,
And at Current Prices, the Worst Is Priced In

Here’s a chart of the Dow Jones U.S. Pharmaceuticals Index …

As you can see, major drugmakers have bounced only somewhat since the market’s major low in March of 2009 … and they are still far off their former highs reached around the new millennium.

The problems I outlined above are already well known and help explain why big pharma stocks have missed out on most of the market’s big rally. Yet I would hardly call this industry down for the count.

Instead, I would argue that the skeptics have swung the pendulum too far … and that there are plenty of reasons to be positive on the group going forward, especially at current valuations.

Those big patent expirations? While troubling, many of them won’t really hit results until 2012, giving companies at least another year to work on new products.

Meanwhile, recent acquisitions — particularly in the area of biotechnology — should help these firms develop new blockbuster candidates even with a schizophrenic FDA. For example, Pfizer gobbled up Wyeth in October 2009 … and is now in the process of completing its acquisition of King Pharmaceuticals.

Heck, even if no quick replacements come, big pharma still boasts plenty of “small” products that add up to many billions in annual revenues.

What’s more, a quick look at the industry’s dividend payout ratios shows very ample cash to cover future checks. Take a look …

Moving on to all that government interference: Certainly the winds are blowing less favorably for the industry right now. However, in the U.S. at least, the Republicans have made it very clear that they intend to undo Obama’s healthcare plan.

In addition, losses in Europe could easily be offset by newfound opportunities in emerging markets!

While global pharmaceutical sales are expanding about 5 percent a year, demand for drugs in emerging markets is rising at triple that rate. And in places like China, it’s growing even faster.

The reason for this burgeoning new overseas opportunity is fairly simple: Growing middle classes that are becoming more Westernized in nearly every way — from higher incomes to increasing incidences of diseases that already plague wealthier nations.

So put me in the camp that believes now is the time to scoop up some big pharma stocks … before mainstream investors come flocking back to the group, or the big challenges are solved.

I’m already recommending two of these companies for my own father’s income portfolio, and I suggest you consider the strongest names for yourself, too.

Of course, if you don’t like holding individual shares, you can also get a broad stake in these companies through a pharma-focused ETF such as the SPDR S&P Pharmaceuticals ETF (XPH).

Best wishes,

Nilus

P.S. Please realize that I think pharma stocks are just one of the many important investments you should be putting into your overall income portfolio right now. For the complete picture, including details on how to construct an all-weather retirement portfolio, watch my new online presentation by clicking here.

Nilus Mattive has been obsessed with dividend-paying stocks since the sixth grade. And after graduating from college, he began working for Jono Steinberg's Individual Investor Group, where he wrote a regular investment column. Later, Nilus spent five years at Standard & Poor's editing the company's flagship investment newsletter, The Outlook. During that time, Nilus also penned his first finance book, The Standard & Poor's Guide for the New Investor. These days, Nilus loves telling investors about dividend-paying stocks in his monthly newsletter, Income Superstars.

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Luxury Retail Stocks: Why I Like This One the Best

Two important facts in these changing economic times:

Fact number one: The higher-end crowd is making money again. The economy has improved, Wall Street bonuses are back in vogue. Luxury buyers are loosening their purse strings once more.

Fact number two: There is an increasing disparity between low-income earners and high-income earners, not just in America, but throughout industrialized countries. Luxury retailers have done an excellent job targeting their brands to the higher-end market and the luxury-item buyers are very loyal to the brand of their preference.

This morning comes news that LVMH Moet Hennessy Louis Vuitton SA is buying the world’s third-largest jeweler, Bulgari, for about $5.2 billion. LVMH already owns these brands: “Louis Vuitton,” “Hennessy,” “Donna Karan,” and “Glenmorangie” and 20% of Hermes International among others.

My readers might think these luxury brands will be the first to face difficult times if the economy starts to contract again, but America is only a small market for these high-end luxury brands. Asia is the biggest market for these brands and the rising upper-class in Asia just “eats up” the luxury brands.

Milan-based luxury retailer Prada SpA announced this morning that it would be going public…raising $2.0 billion on the Hong Kong Stock Exchange (HKSE). Hence, here you have an Italian iconic brand deciding to list on the HKSE as opposed to a European stock exchange. Why? Because Hong Kong is closer to Prada’s fastest growing sales region, Asia.

LVMH Moet Hennessy Louis Vuitton SA stock was trading at the equivalent of only $40.00 U.S. a share in January of 2010. Just 15 months later, it trades at $111.00 U.S. a share. At the rate this company is expanding, it might own the luxury brand market soon. Keep an eye on this stock.

Michael’s Personal Notes:

I rant so much about owning the precious metals stocks, my colleagues think that readers will be opting-out of PROFIT CONFIDENTIAL as they will eventually get tired of being beaten over the head by my screams to get into the precious metals. I beg to differ. The precious metal bull market is only in Phase II. The most spectacular profits still lie ahead and my readers’ biggest gains from the precious metals play have yet to come.

This morning, silver hit a new 31-year high, up three percent alone today. Last week marked the fifth consecutive week that gold bullion prices rose. The precious metals are rising as I predicted; gold and silver stocks have been the biggest winners of the year so far.

“Oil, Gold Climb on Libya Fighting; Greek Debt Risk Increases,” flashed the headline on Bloomberg this morning. I don’t buy it and I do not want my readers to buy it either. The media always tries to find something to attribute the rally in metal prices to, but they do not understand the real reason gold is rising…and it all comes down to a couple of world economic events:

Inflation is rising. Last week, gas prices hit $4.00 a gallon in California and $8.00 a gallon in the United Kingdom. Gold rises during inflationary times. The U.S. dollar is close to breaking below major support levels against other popular world currencies. If the U.S. dollar continues to fall, the viability of the greenback as the world’s official world reserve currency will come into question. And only gold can replace the U.S. dollar as the reserve currency.

Where the Market Stands; Where it is Headed:

The Dow Jones Industrial Average opens this morning up 5.1% for the year. I still haven’t changed my opinion on the market: We are in the midst of a bear market rally that will bring stock prices even higher in the immediate term.

Short- to long-term, I’m bearish on stocks because of rising long-term interest rates, rising inflation, lack of action by the government to curtail spending, and the quiet devaluation of the greenback.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And, in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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