On Thursday, it was announced GDP is back on the climb. That was followed with the claim one million jobs were created or saved due to stimulus spending. And that’s right on pace to meet the goal (imagine that?). So the best marketers don’t want to let an opportunity to take credit for the free exchange of goods and services between individuals.

But on NBC’s Meet the Press, Treasury Secretary Geithner may have inadvertently signaled the gold bull market has a long way to run. In the interview, Geithner said, “[The recent positive economic news] shows that — when you act with force — you can stabilize a crisis like this.”

Force…Force is good!?!

Cranking up the printing press, nationalizing major industries, and increasing taxes (healthcare, cap and trade, VAT, and whatever else happens after 2010 elections) will, in the long run, go a long way to preventing a genuine recovery.

But this is part of the process. It’s training the monetary managers to make terrible mistakes, yet not realize they were mistakes. They’re learning the wrong lessons. And when the next downturn comes, whatever the catalyst, they’ll respond with even more “force.”

And it will be that move that pushes gold to much higher levels. In the interim, anticipation of that eventuality will help keep gold prices propped up.

That’s why now, with the markets showing their greatest weakness in months, gold stocks getting hit 10% to 30% across the board is a great time to continue getting in place for the next “forceful” response. Here are the two best spots to start putting your dollars to work in gold.

Exploration is Back

One of the hardest hit sectors during the credit crunch were the gold exploration companies. Their cash-draining business models were left for dead as the gold price fell, institutional investors saved cash to meet redemptions, and hedge funds deleveraged.

That was over a year ago though and a lot has changed. Gold is setting new highs and money is flowing back into the exploration market. More importantly though, there have been some major discoveries in the past few months which will bring even more speculators back into the market.

The biggest discovery of them all has been Ventana Gold (TSX:VEN). It’s a Columbian gold explorer which has leapt from discovery to development in a few short months.

Since we said Ventana was “the next bonanza discovery” and that it “struck gold – lots of gold!” in our free gold stock report a little more than six months ago, its shares have climbed more than 700%. And the company now counts mining entrepreneur Ross Beatty and Brazil’s richest man, Eike Batiste, among its shareholders. Both now own more than 10% of outstanding Ventana shares.

It has gone from unknown penny stock with a small cash position and an aggressive exploration program to a bona fide discovery with a market cap of more than $800 million which just closed a $40 million financing deal.

This is the type of discovery and massive gain (Ventana went from 20 cents per share to $10 per share in about a year) which sparks the greed necessary to help keep the money flowing into gold exploration stocks.

Of course, a lot of things have to come together before gold exploration really gets going. The combination of high gold prices, a rising stock market (increasing risk appetite), and a couple of major new gold discoveries have made it much more enticing though. Right now, there are still a lot of small exploration companies trading for less than $20 per ounce of gold in the ground and they were fetching as much as $50 per ounce of gold in the ground two years ago.

It’s not just the high-risk/high-reward gold exploration stock sector getting some attention; junior gold stocks are still in the relatively early stages of recovery too and offer exceptional value.

Junior Gold Stocks: 60% Undervalued

The other gold sector which just got a lot more attractive in the past week has been junior gold stocks.

A quick look at the McEwen Junior Gold Index shows it all. The index tracks junior gold stocks that are actively traded (minimum $50,000 average daily trading volume) and have minimum market caps of $50 million.

Since November 2007 when the index was hitting all-time highs, gold prices have climbed 30% and the junior gold index is down 60%.

That’s just half the story though. Their outlook gets even brighter when you look at the big gold stocks. The Philly Gold/Silver Index (XAU), which tracks the major gold and silver miners, is down only 15% from its November 2007 highs.

This is a really simple one. Gold is up 30%, major gold stocks are down 15%, and junior gold stocks are down 60%. Which one would you like to buy now?

If you like gold, you have to love the juniors.

The Trend is Still Up

Those are the best two opportunities in gold right now and this is as good a time as ever to start reloading on gold stocks.

You can practically see the confidence of administration and Federal Reserve officials growing by the day. They are now trained and will know exactly what to do next time. Regretfully, that move will likely be what propels gold prices to the next level.

It’s no wonder that while the government claiming “success” and “back from the brink” talk abounds, some of the world’s best investors are loading up on gold and gold stocks. Hedge fund manager John Paulson has led the headlines, but the ranks of newly minted “gold bugs” now includes top-performing investment managers Steve Leuthold,  and many others.

They see what’s coming and I hope you do to. Now, you just have to maximize the opportunity.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Few technology stocks pay dividends like IBM. To be sure, the yield is only 1.8%. But that’s a lot more than you can expect from Apple (AAPL) or Google (GOOG), and IBM is a much better value at just 11 times 2010 earnings. Best of all, IBM’s dividend is as reliable any. The company has paid it every year since 1916. The five-year dividend growth rate is close to 27%.

In addition to the dividend outlook, IBM is in a solid cash position. The company recently announced it will add $5 billion to a share repurchase program that now rests at $9.4 billion. Management isn’t stopping there. IBM said it plans to ask its board for more buyback cash next year. Returning value to shareholders is obviously a priority for IBM, which says it has sent $73 billion to investors in the last decade in the form of buybacks and dividends.

IBM finished the third quarter with $3.4 billion in free cash, up $1.3 billion from a year earlier. In a market that prizes strong balance sheets, IBM is an alluring investment. The company is well-positioned to weather slow economic growth because it helps customers reduce costs and operate more efficiently. At the same time, any economic rebound will provide a jolt to IBM’s top line.

IBM’s cash position and emphasis on creating shareholder value make it one of the safer bets for long-term investors. To go with a growth-like stock and a solid, conservative company, buy IBM.

Brandon Clay
Invest With An Edge 

Disclosure compliant with FTC 16 CFR Part 255 covering myself and my employer: No positions in any securities mentioned. No income, revenue, or other compensation received directly from, or on behalf of, the companies mentioned.

 

Almost every sector has done exceptionally well.

Car rental companies have delivered 500%+ returns from their lows. Banks and real estate stocks just go higher and higher. Oil’s inching closer to $80 a barrel. Natural gas has recovered nicely from its summer beating.

Even long-time contrarian standbys like gold and silver stocks have, in many cases, bounced back to their 2008 highs.

The breadth of the rally has been exceptional. The run over the last six months has pushed the S&P 500 P/E ratio from below 15 in March to above 19 (as tracked by Robert Shiller’s inflation adjusted, 10 year average earnings model). Also, the dividend yield for the S&P 500 sits at a low 2.28%. The index’s yield has historically hit 6% or higher at true stock market bottoms.

Basically, the market is overvalued. Frankly, it has been for more than 20 years.

It will change – eventually. That doesn’t mean there’s no opportunity. As in all type of markets, bull or bear, there will always be safety and opportunity in value stocks. The more out of favor the sector or stock, the lower the downside risk and the greater the upside potential.

But here’s the problem. After such a meteoric rise in the markets, are there any true values really left? Are there any sectors or stocks which haven’t done well in this rally?

Well, all I can tell you is there aren’t many. But there is one that, due to an improbable one-time event, has barely joined in this rally at all. Yet still offers plenty of opportunity in the months ahead as well as exceptional opportunity in the next decade. And a few days ago we got the perfect “buy” signal from the markets.

Anything That Can Go Right, Might Go Right

I’m talking about agriculture. We all know the basic story for agriculture. World population is growing. The world is getting richer. And the world is consuming more food.

It’s there, its long term, and everyone knows it. The way the agriculture situation is shaping up, the only way you will not come out ahead is if you sell out too early or don’t have a long enough time frame.

Despite all the obvious long-run upside potential though, agriculture sector stocks have fallen grossly out of favor lately. But it won’t last forever. And there will be a few opportunities to buy in at great prices. Right now is one of those times.

The past year or so has been tough for agriculture for a number of reasons.

First, there was a truly massive agriculture bubble last year. Hedge funds were leveraged to the hilt raking in massive gains on the steady 5% to 10% monthly returns from stocks across the agriculture sector. All the warning signs were there. The bubble was a great ride up and led to an equally great fall when it burst.

Second, the past year’s growing season turned out to be another exceptionally great one. The agriculture growing season could not have started out any worse. South American farms’ harvest was devastated by drought to start off the year. Floods in the leading agriculture-producing states pushed plantings weeks and, in some cases, months behind schedule. And the credit crunch cut into farmers’ risk appetite and they scaled back greatly on fertilizer use.

It was the perfect storm for agriculture. But again, this is farming and there are a lot of other variables. The most unpredictable and most important one is weather. This year the weather turned out perfectly. Farmers needed sun, they got it. They needed a break for rain, they got it.

Anything that could have gone right did go right. The expected disaster was, for one more year, narrowly averted. The US Department of Agriculture officially reported “bumper crops” across many major agriculture commodities like wheat, soybeans, and corn.

But farmers won’t be able to bypass Murphy’s Law like they have been over the past three years forever. An off-year will come. And, quite frankly, it’s due.

That’s why, after the third stellar annual harvest, agriculture stocks are looking as good as they have in years. And right now is looking like a good time to move into them.

The Greatest Buy Signal of All

The old saying, “buy on bad news, sell on good news” has worked out exceptionally during the last bull market. Odds are that if you bought on bad news between 1982 and 2007, the stock would eventually reach a higher point.

Bull markets have a tendency to make almost any strategy look good though. And we’re no longer in a bull market. As a result, the safest and most profitable opportunities will come to those who wait for the really bad news.

The really bad news came for agriculture stocks last week. Although the mainstream financial headlines were focused on gold, banks, and real estate, one of the world’s leading fertilizer stocks quietly sent out a buy signal early last week.

You see, Mosaic (NYSE:MOS), a company which produces the full spectrum of fertilizers, reported its earnings fell 91% when compared to the same quarter last year. The company cited a sharp decline in sales. Mosaic’s top-line revenues fell from $4.32 billion in the same period a year ago to a paltry $1.46 billion this year.

On top of that, Mosaic missed already tragically low expectations Wall Street had for it and other fertilizer companies (see table below for how low the estimates were).

In Mosaic’s case, analysts were expecting earnings of 35 cents per share. The company only posted 23 cents in earnings per share.

Everything that could have gone wrong went wrong for Mosaic. But something odd happened. Shares of Mosaic actually went up.

That’s the “buy” signal. When terrible news comes out or exceptionally poor earnings results and the stock goes up, it’s a clear signal all the sellers who wanted out have gotten out.

It’s Tough to Go Wrong When Everything is Expected to Go Wrong

That’s why there are a lot of reasons to like agriculture – specifically fertilizer stocks – even more so right now.

Sure, we have the long-term fundamentals. There’s pressing issue of Peak Soil, growing world population, ballooning global middle class, etc.

But there’s also another very important reason for a strong year for fertilizer next year which most investors are just catching onto. That’s the impact of this year’s bumper crop. Plants take nutrients out of the ground. The bigger they grow, the more nutrients they use. That’s why after this season’s exceptional crop, farmers will need to use a lot more fertilizer next year to make up for the lost nutrients.

Finally, from a timing perspective, it really is tough to go wrong when expectations are so low. Remember, great expectations tend to produce great disappointments. And the same is true inversely.

So yes, the markets are soaring. Yes, there aren’t very many undervalued sectors out there. Yes, despite the strength and length of this rally, we’re still in a long-run bear market. But, for those willing to find them, there is always some sort of opportunity out there.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Back in the mid- to late 1970’s, as gold went up from its 1972 low of $60 to $850 in 1980 (and silver to $50), gold and silver stocks realized absolutely amazing gains:

·                                 Lion Mines – 1975 price: $0.07 / 1980 price: $380 i.e. an increase of 542,757%!!!

·                                 Azure Resources – 1975 price: $.05 / 1980 price: $109 i.e. an increase of 217,900%!!

·                                 Wharf Resources - 1975 price: $.40 / 1980 price: $560 i.e. an increase of 139,000%!!

·                                 Mineral Resources – 1975 price: $.60 / 1980 price: $415 i.e. an increase of 69,067%!!

·                                 Steep Rock – 1975 price: $.93 / 1980 price: $440 i.e. an increase of 47,212%!!

·                                 Bankeno – 1975 price: $1.25 / 1980 price: $430 i.e. an increase of 34,300%!!

The percentage returns above, averaging 70,627%, seem totally unbelievable but they are verifiable. They were achieved by investing in the right stocks at the right time. Imagine, and the above companies were only a handful of the gold and silver stocks that generated such astounding returns.

To put things in perspective let’s look at it this way. Had an astute investor divided a $10,000 investment equally among the 6 companies mentioned above in 1975 it would have grown to $7,072,700 just 5 years later!  I can’t imagine that ever happening again but that is what actually happened back then. It is absolutely amazing, isn’t it? Even a 10,000% appreciation would have turned that $10,000 into $1 million dollars! Remember, it only takes a few good investment decisions in one’s life to be exceedingly successful and that was such a time.

I know, I know, you think that was then and this is now and increases in excess of 500% let alone 1000% or more would never happen again. Well, that was not the case. Take a look below (chart compliments of Doug Casey’s International Spectator) at what happened to the shares of mining companies during the mini-bull market in gold in 1993-1996. The larger producers did well (+84.2%) but look at what happened to a selected group of juniors during that 3 year period. The returns averaged 1,546.4%!

Will such happen again within the next 5 years? Most likely! In fact, just in the past 12 months the Gold/Silver Companies with Warrants Index (GCWI) of 22 such companies (5 large-cap; 3 mid-cap; 2 small-cap; 12 micro or nano-cap) has already appreciated by 183.7% from its 52-week lows while the 24+ months duration warrants of those companies (26 in total) in our Precious Metals Warrants Index (PMWII) have already gone up 366.2%. That is correct: 366.2%!  And that only represents the first year of major gains.

As seen below the GCWI is up 51.6% YTD and the PMWI is up 73.8% YTD. Yes, the Commodity Companies with Warrants Index (CCWI) and Commodity Warrants Index (CWI) are up by even greater amounts (85.5% and 153.7% respectively) but these indices also include other mining companies (8), oil and gas companies (2), merchant banks (3) and 1 mutual fund with one or more warrants each (47 in total).

Last Week’s % Performance(1)

All calculations are based on U.S. dollar equivalents

(2) Week ending October 2nd, 2009

(3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro and nano cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.

(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.

(8)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least a 24 months duration, found in the CWI.

(9)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

Are you are of the opinion that the U.S. dollar is going to continue to weaken against other currencies? Are you of the opinion that we are going to have significant inflation in the next few years? If so, then we are going to see gold and silver doubling or tripling in price as a result. As such, it is imperative that you invest in either the stocks of the companies that mine the gold and silver and/or in the royalty companies that buy the gold and silver from mining companies at predetermined fixed prices. Better yet, much better in fact, is that, wherever possible, you should purchase certain of the long-term warrants offered by some of the gold and silver mining and royalty companies as a means of realizing your +5,000% returns.

Why Buy Gold and/or Silver Mining/Royalty Stocks instead of Physical Gold or Silver?  To Double Your Returns – or Possibly More!

If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to  $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap companies (currently 2.6:1 YTD for HUI companies according to the table above) on average to as much as 6:1 for gold and silver mining/royalty companies (currently 3.9:1 YTD according to the Gold/Silver Companies with Warrants Index), on average and even 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason for you to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties and reap the major benefits of such a surge in the future price of gold and silver.

Why Buy the Warrants instead of the Stock of Certain Gold/Silver Mining and Royalty Companies? To Further Double Your Returns – or More!

For those of you who are prudent enough to do your homework and buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s undervalued prices, your eventual returns would likely be 1.5 to 3 times greater (currently 1.4:1 YTD for the Precious Metals Warrants Index vs. the Gold/Silver with Warrants Index) on average than had you invested in their associated stocks. For companies whose stock prices go through the roof with monster gains that ratio could even be as high as 5:1.

That’s referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values, exactly how to go about buying them and which on-line brokers are sufficiently knowledgeable and capable of placing American, European, Australian and Asian orders (there are no problems for Canadians placing such orders with their brokers as most such securities are traded on their TSX or TSX Venture exchanges) check out the PreciousMetalsWarrants site below.

Can Gold and Silver Equities Expect +5,000% Returns Once Again?

Using the above ratios the answer is: “Yes they can!”  True, not all such companies with reap such returns but a few of the well chosen ones will once again see returns that most gold bugs dream about. All it is going to take is an environment in which some combination of a declining U.S. dollar, rampant inflation (or fear thereof), high interest rates, ongoing financial instability, further economic turmoil and occasional acts of terrorism come together to interact with high gold and silver prices and some trading mania. We are moving in that direction right across the board so it is just a matter of time.

We are in the eye of the storm and when the other side of the vortex engulfs us gold and silver will increase considerably, their associated stocks will go up substantially and their warrants, where available, will escalate dramatically. Those mega returns can be yours in the future if you start today to prepare for that day.

To my readers:

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy – drop me a line or two.

Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity. I will be speaking at the World MoneyShow in Toronto in October. If you attend please introduce yourself.

We have two web sites that we believe will help you make money in these very volatile times.

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.

b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

Thanks for the read.  – Lorimer.

For the typical individual investor it’s easy to get caught up in the hype of the stock market. These days the hype is generated 24 hours a day across major media channels. And after the major decline driven by the global financial crisis, the attention to stock prices has perhaps never been greater.

But the market has roared back 62 percent in just seven months. And there’s a vast crowd who thinks they’ve missed the boat on this historic run. A lot of that has to do with false expectations of what the stock market index offers and misconceptions on its past returns.

Remember, It’s All about Risk!

Most professional mutual fund managers do not beat the S&P 500.

Inexperienced investors think they should be able to buy at bottoms, sell at tops and make gobs of money. But that’s a highly difficult task.

The long-run annualized return for the S&P 500 (including dividends) is 9 percent. And after fees, most professional mutual fund managers do not beat the S&P 500.

Moreover, too many investors do not understand the risk they’re asked to take to achieve a 9 percent return.

The volatility of stock market returns is best measured by looking at the dispersion of returns around the average return. This gives you a clue as to how much risk you have to endure to achieve your expected return. It’s called the standard deviation and is a good way to measure risk.

The standard deviation of the S&P 500 is 19 percent.

This means roughly 70 percent of the time, the S&P 500 should trade plus or minus 19 percent around its long-term average return. So if you use standard deviation as a gauge of risk, you’ll find that the broad stock market pays you only 1 unit of return for 2 units of risk taken.

Take a look at these two hypothetical charts …

Both investments have an 8 percent average annual return. But Investment #1 has a wide range of returns, while Investment #2 has a stream of returns that more tightly hug the average annual return.

If each of the points on the charts represents a monthly return and both investments achieve the same end result, which investment should you choose?

The answer: Investment #2 — the one with the tighter distribution of returns since it gives you a higher probability of achieving a higher return.

Here’s why: Your investment’s performance will largely depend on when you enter and when you exit. If you enter or exit at any given point along the path of Investment #2, the likelihood of success is greater than it would have been with Investment #1.

So unless you think you can pick the exact bottom to enter and the exact top to exit, you’re far better off finding investments that have a tighter distribution of returns.

The bottom line is, a buy and hold strategy in the broader stock market index just doesn’t compensate you for risk. That’s why it’s important to find more sophisticated strategies using a wide range of investments options (including stocks, bonds, currencies, and commodities) that target positive returns and offer diversification to your portfolio.

The Goal:
Positive Risk-Adjusted Returns

Whenever the stock market has a down year most mutual fund managers start talking in terms of relative returns. You might see a manager’s monthly letter tout how well they did relative to the S&P 500. For example, they may be down 35 percent when the S&P 500 was down 38 percent. That’s a win in their eyes! And the manager gets a bonus.

But as ridiculous as that sounds, the same can be said for the other side of the coin … when stocks are rising, relative returns are equally as meaningless.

Alternatively, investors should keep a constant focus on achieving positive annual returns, year-in and year-out. And those returns should fairly compensate them for the risk that is being taken. By that, I mean you should expect to achieve greater than one unit of return for each unit of risk taken. In other words: You want a positive return that’s adjusted for risk.

This investment strategy will give you a better chance of growing your money during your specific holding period.

Currencies As an Alternative Asset Class

Currencies can help you profit and reduce your portfolio’s risk.

In addition to stocks, currency investments are a great way to add risk-adjusted returns that are uncorrelated to stocks to your portfolio.

What’s more, there’s always a bull market in currencies since the decline in one currency always reflects the rise in another currency. That means no matter what’s happening in stocks, bonds, commodities or real estate, you can profit!

So if you think that you may have missed the boat on the stock market’s recent surge, remember this … currencies still offer loads of opportunities to earn terrific returns … ALL the time!

Regards,

Bryan Rich
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

But for years, Americans had a hard time gaining access to the smaller international markets. Try to buy a stock from, say, Jakarta, and most stockbrokers would hang up the phone! Opportunities in those places were available only to a select few investors.

Exchange traded funds (ETFs) are solving this problem. Now you can diversify your portfolio into many hot, new markets with one simple trade on a U.S. exchange.

Let’s take a look at five, recently-launched international ETFs that can help you get off the beaten path …

International Opportunity #1:
Market Vectors Vietnam (VNM)

Vietnam was a closed society for many years following the communist takeover. Now, much like China, it’s turning capitalist with a vengeance.

Vietnam is one of the world’s fastest-growing economies.

With a young population, a strategic location, and abundant natural resources, Vietnam is one of the world’s fastest-growing economies. The country exports rice, oil, cashew nuts, and black pepper. Privately owned businesses are thriving! And the industrial sector is growing fast.

VNM gives you a slice of the local stock market, including financial, energy, industrial, and consumer companies. Risky? Yes, but the opportunities are huge as nearby China takes its place as a world economic superpower.

International Opportunity #2:
Market Vectors Indonesia (IDX)

You might think that a country with the fourth-largest population in the world would be a little better known. Strangely, though, Indonesia isn’t on the radar screen for most U.S. investors. It should be …

With more than 17,000 separate islands, the Indonesian archipelago straddles trade routes that have been important for centuries. And its many ethnic groups are united by a common language.

Like Vietnam, Indonesia has a wealth of natural resources, including oil, natural gas, gold, copper, and a huge variety of agricultural goods. The vibrant internal market makes the country less dependent on exports than many Asian markets. In fact, Indonesia’s service sector is larger than its industrial and agricultural counterparts.

With IDX, you can buy into the Indonesia growth story quickly and easily. This ETF includes banks, telecom, energy, materials, and industrial stocks.

International Opportunity #3:
iShares MSCI Peru (EPU)

Peru’s Machu Picchu was once a great Inca city.

Peru has some of the most varied terrain in the world — snow-capped Andes peaks, Amazonian jungles, coastal plains. And back before Columbus came along, Peru’s Inca were the largest civilization in the New World.

Today Peru is a top metals producer. And EPU makes the most of that by investing heavily in companies that mine gold, copper, and other metals. What’s more, the government is working hard to diversify the economy, and it’s making good progress. A 2006 free trade agreement with the U.S. was a major step.

When metals prices are rising, Peruvian markets tend to do well. EPU is a great tool to take advantage of those opportunities.

International Opportunity #4:
Global X InterBolsa FTSE Colombia 20 (GXG)

Just north of Peru is Colombia, where ethnic diversity has produced a rich cultural heritage. It’s a country with plenty of risks — and enormous potential rewards.

Coffee is one of Colombia’s top exports.

President Alvaro Uribe and his government have made big steps in subduing Colombia’s illegal drug trade, expanding the economy, and strengthening relations with the U.S. and other trading partners. The result: One of the fastest economic growth rates in Latin America.

GXG is a concentrated portfolio of mostly financial and energy stocks. Like all emerging markets ETFs, I expect a lot of volatility in GXG, but I also see a lot of potential. And although Colombia is booming, it still has plenty of room to grow.

International Opportunity #5:
Global X FTSE Nordic 30 ETF (GXF)

The funds discussed above all cover a single country. But GXF is different in that it focuses on a region: The Nordic nations of northern Europe including Sweden, Denmark, Norway, and Finland.

In contrast with Colombia, these Nordic nations are among the most stable in the world. The population is educated, multilingual, and prosperous. Are there challenges? Of course, but you can’t argue with results. And the results of the Nordic stock markets have been impressive indeed.

GXF includes 30 companies from the region, with Sweden having the most weight at almost half the portfolio. The stocks in GXF do business around the world. So if you want both growth and stability, this ETF might be just what you need.

These five new ETFs give you tremendous opportunities for profit that you can’t find in regular mutual funds. They’re even more proof that ETFs are revolutionizing the way we invest.

However, let me close today with a word of caution: Single-country international ETFs are always risky. And because they’re relatively new, trading volume can be rather thin. If you buy any of these funds, pick your entry point carefully, use a limit order, and be prepared to ride out some big swings. Also, don’t invest too much of your portfolio in one place.

Best wishes,

Ron Rowland
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Let’s have a look at the concept of contrarianism to find out whether it can give us some guidance during these exciting times …

Contrarians are investors with deep knowledge and strong self-efficacy. They possess a rare nature: They’re willing and capable of forming an independent opinion and sticking to it. Even if a huge majority of analysts, journalists, colleagues, and friends hold an opposite point of view.

As the legendary Wall Street analyst Henry Kaufman wrote in his memoirs:

” … most predictions fall within a rather narrow range that does not deviate from consensus views in the financial community. In large measure, this reflects an all-too-human propensity to minimize risk and avoid isolation. There is, after all, comfort in running with the crowd. Doing so makes it impossible to be singled out for being wrong, and allows one to avoid envy or resentment that often inflicts those who are right more often than not.”

Warren Buffett doesn’t mind bucking the trend when he gets the right signals.

But contrarians usually don’t take the easy route … they’re accustomed to swimming against the stream. And they rarely make friends by doing so. Instead they expose themselves to mockery when they’re wrong and to wrath and envy when they are right.

In Fact, There’s a Risk with
Always Being a Contrarian …

Contrarians may be early with their timing. For that, they will be laughed at. But they don’t mind … they know that they’ll eventually be proven right.

They know that imbalances and the madness of crowds can go on much longer than anyone can imagine ― so they wait for the unavoidable to happen. Hence contrarians need patience and discipline. They have to have the guts to try again and again to finally catch a major trend change.

Only by luck, though, will they hit a homerun with the first try. More often than not they have to implement a position step by step to average down their costs. Or they’ll try to get in a few times, only to be stopped out with a small loss again and again until finally they get it right — and hit it big!

My Point Is Simple:
It’s Good to Always Think Like a Contrarian, But You Should Only ACT Like a Contrarian When the Time Is Right …

Markets are trending, and strong trends can regularly go on for many months or even years. As long as a trend is intact, investors should embrace it and run with it. Only during its end, when it’s on the verge of turning, should you jump off and become a contrarian. Otherwise you’ll always find yourself fighting the trend instead of making some nice gains.

So it should be clear then that a successful investor must approach the market with the skepticism of a contrarian but also know how to follow the trends.

How can this be accomplished?

By applying technical analysis and common sense.

There’s no holy grail of investing. But there are some very good and rather simple tools, or indicators, that can help you know when it’s time to follow or buck the trend.

One of the best known trend-following tools is the 200-day moving average. As long as it’s rising, you should be looking to buy the dips. And when it’s declining, you should be looking to sell the rallies.

Combine it with the advance/decline line and the advance/decline volume line to give you early warnings of a possible trend change.

Smart investors know when it’s time to leave the crowd … and become contrarians.

Of course that’s not all it takes to become a good investor. Monetary policy and macro-economic analysis should be added to your analytical tool box, too.

And here’s a piece of old Wall Street wisdom that’s regularly forgotten exactly when it’s needed the most: “Never fight the Fed.” So contrarians watch for short-term rates to go higher than long-term rates. That tells them that a recession and a stock market plunge could be coming.

Finally, you should follow the leading economic indicators (LEI). In my August 26 Money and Markets column, I told you how the LEI is the most successful recession predictor I know of. When they signal a recession, you should believe them and start to leave the bullish crowd. And when they’re predicting that the economy will grow, you should value this insight and act accordingly.

Today the LEIs are predicting that the economy will grow. Fed policy is very lax. And the S&P 500 index’s 200-day moving average is rising as are the advance/decline lines.

Therefore, you should expect the stock market’s rise to continue no matter what the little contrarian inside you might be thinking.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Back in July we discussed a new search engine: Bing. The brainchild of Microsoft (MSFT), Bing is actually a re-branding of MSN/Live search. Since its well-touted (and amply funded) launch, Bing has been eating into Google’s enormous search market share.  MSFT is dedicating a lot of resources to catch up with Google.   Microsoft made a smart move by focusing on search and search advertising. Growth dollars are there for the taking, especially with their new search deal with Yahoo.

Yahoo (YHOO) recently made news when new CEO Carol Bartz downplayed the company’s search engine by saying, “We have never been a search company.” In context, Bartz was underscoring Yahoo’s efforts to build websites and communities while not focusing completely on search. She is is right about one thing: search is not the only place for online media growth. Consumers and businesses may use search engines to find things, but they spend most of their online lives at websites. Think Facebook, Twitter, DrudgeReport, and Yahoo. Bartz thinks building up those online assets will have a higher payoff that an improved search engine.

This brings us to Google (GOOG).  Betting against the Googleplex hasn’t been a good move very often, and there’s good reason not to do it this year. Still holding 65% of the online search engine market, GOOG is also expanding its ad network to emphasize display advertising such as banners, videos and partner websites. Display advertising is Yahoo’s playground, but Google wants a slice of the pie as well.  The question is whether is they can do it well while maintaining their position in search advertising.

If individual stocks are not your thing, check out PowerShares Dynamic Media (PBS). This ETF holds a mixture of traditional and new media companies.  Top holdings include Google, Comcast, News Corp, Viacom, and Disney.  PBS is up more than 40% this. We still like the prospects for online media.  PBS is an easy way to play this sector.

Brandon Clay
Invest With An Edge

Always buy undervalued stocks and sell them when they’re overvalued. Or more commonly: “Buy low, sell high.” Of course, if you’ve invested for more than a week, you know this is easier said than done.

Undervalued (cheap) and overvalued (expensive) are such subjective measures when it comes to investing. Most times we end up guessing and most times we end up overpaying.

But today, let me show you one amazingly simple way to always buy stocks that are truly cheap…

Why America’s Most Successful Investors Buy “Low-Density” Stocks

All you have to do in order to invest like Warren Buffett, or any of America’s most successful investors – and rack up easy double-digit gains – is to buy what I call “low-density” stocks.

I define density like this: The value the market assigns to the cash that a company has in the bank.

• A high-density ratio: Means the market overvalues the cash.
• A low-density ratio: Means the market undervalues the cash.

The reason I focus on cash is straightforward: It’s the most tangible, liquid asset – and the easiest to value. After all, $1 is worth $1, so it’s easy to tell when you’re overpaying or getting a discount.

Let me use an example to make this concept crystal clear…

• Company XYZ trades for $1 per share and has $1 per share in cash (total cash divided by shares outstanding).
• To calculate the density ratio, we simply divide the price per share by the cash per share. In this case, the result is 1.

Here’s the thing, though: A one-to-one ratio is uncommon.

Most of the time, you’ll have to pay a premium for a company’s cash. Right now, for example, the density ratios for more than 480 companies in the S&P 500 are higher than 1, meaning you’ll pay more for these shares than they’re worth in cash.

But it’s even rarer to find a stock trading at a density ratio below 1.

Density Ratio Below 1 = Cheap Stock & Massive Gains

A density ratio below 1 means a stock could be worth $10 in cash, yet it trades for $7.50. Or it’s worth $1 and trades for 75 cents, etc.

And rest assured, whenever America’s best investors can buy $1 for 75 cents or less, they do. And you should, too. That’s because these discounts, understandably, don’t last for long.

Just take a look at Cynosure, Inc. (Nasdaq: CYNO). It traded at a density of roughly 0.70 for about a month this year. Once investors woke up to the bargain on offer, shares surged 138% higher.

There’s another low-density stock up for grabs at the moment, too…

Buy This “Low-Density” Stock Today

If you want to put my low-density strategy to work today, consider Trident Microsystems, Inc. (Nasdaq: TRID), which makes specialized semiconductors used in flat panel televisions.

• With zero debt, $2.87 per share in cash, and a market price of $1.90, it trades at a density ratio of 0.66.
• In other words, when you buy Trident, you’re buying $1 for 66 cents.

Incidentally, such a steep discount also makes Trident a prime takeover target. And with $2.21 billion in cash, Broadcom Corp. (Nasdaq: BRCM) could easily afford the $125 million market cap Trident.

But, even if Broadcom doesn’t pounce on the opportunity, history dictates that other investors will.

Based on its low-density ratio, Trident needs to rebound 51% to return to a density ratio of 1.

I recommend you capitalize on this truly cheap stock before it’s too late.

Good investing,

Louis Basenese
Investment U

Since April, the commodity has embarked on an extreme upside move, shooting to highs not seen since sugar hit $0.45 per pound in 1981. The chart below illustrates it perfectly…

Sugar Chart: http://www.investmentu.com/images/sugar_082509.gif

The main reason for such a large jump was news from India, which indicated a potentially low sugar crop.

Over the past couple of weeks, the sugar market has surprised many analysts by trading even higher. I say that because while fundamental news like this often results in impressive-looking moves, its impact has a limited lifespan.

So be warned. Moves like this usually indicate that the news is factored into the price and we’re entering the last phase of the bullish run.

Based on my experience in the commodities markets, where I’ve seen this type of pattern many times, I believe we’re headed for an inevitable turnaround for the sugar market. Here’s what you can do to profit form this, and two other commodities to keep an eye on.

How to Play the Sugar Market to the Downside

If you want to play the sugar market to the downside, I suggest you buy put option contracts, or by selling limited-risk call option spreads. At the moment, the October 2009 and March 2010 option contracts are the most active.

As you can see on the chart of the October 2009 futures contract above, the price surpassed the $0.2300 per pound level twice, moved back to $0.2150 per pound, then trotted past the $0.2300 mark again.

This is what technical analysts call a “triple top” and if sugar doesn’t move above $0.2300 again, we can seriously count on the market having a big retracement lower – most likely between $0.1900 and $0.2000 per pound.

So if you play the downside and it does make that retracement, I’d suggest taking profits at that $0.1900 to $0.2000 level.

Oil Heading For $80… And Beyond: Three Ways to Play the Move

Given the historic rise and fall of the oil market and the current state of the global economy, you’d never think that it could even consider the idea of moving higher again.

But the market continues to amaze everyone with its resilience and strength, with the current price hovering around the $74.50 per barrel area.

And with conflicting reports on the global demand for oil over both the near term and long term – plus weekly inventory reports that show a strong buildup of supplies one week, followed by draw-downs the next week – it’s easy to see how this can be a very treacherous market.

Here’s the deal: Regardless of what statistics are released and how Congressional attempts curtail oil trading limits, it’s clear that the oil market continues to bring in speculators from all levels – and will most likely keep trekking higher.

Check out the oil chart below. The price is currently trading above all three main moving averages (20-day, 50-day, 200-day) and is now looking to pop above the recent high of $75.27 from June 11. If that happens, we could easily see oil shoot to $80 from there – with $90 probably right behind.

Oil Chart: http://www.investmentu.com/images/oil_082509.gif

There are a couple ways to play the oil market – be it on the long or short side…

• The futures and futures options that trade on the floor of the NYMEX. This is usually best for experienced commodities investors.
• Through an ETF like United States Oil (NYSE: USO), which tracks the price performance. This gives you broad exposure to the market through one investment, rather than playing individual companies. It’s also a less expensive way to play the market and doesn’t require a commodity trading account.

You can either play the USO shares directly, or the options on the ETF. No matter whether you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give your directional call ample time to mature.

The Grain Markets: Summertime Means We’re on “Grain Watch”

Finally, let’s hit the grain markets (corn, wheat, soybeans)…

During summer, these markets can really turn to the upside, as the growing season can be extremely volatile, particularly if the weather is less than ideal.

The June-October period typically sees more speculation in the grain markets than any other time of year, purely because of the prospect of more volatility. Regardless of what any fundamental data may show, nothing can compare to the sheer panic-buying when we receive weather reports that show how a drought could wipe out a year’s worth of crop.

And some of it doesn’t even need to necessarily happen… it’s merely the potential for it happening, based on previous history. Fortunes can be made or lost in just those few summer months.

Buy Corn Commodities Low… And Ride the Bullish Move Higher

This year, for example, we’ve seen corn and wheat prices shuffle around their annual lows, due to government reports that show ample planting, high carry-over levels from last year and crop production that is ahead of schedule.

Corn Chart: http://www.investmentu.com/images/corn_082509.gif

With corn currently at its lows, if any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved.

Like with the sugar market, the best way to play corn is through limited-risk option strategies. Stick with expiration months of December 2009 or March 2010, so that you give the market plenty of time to mount a bullish move.

Good trading,

Lee Lowell
Investment U

So when it comes to reporting on it, you could easily come to the conclusion that I’m about as far away from an unbiased journalist as you can get.

But you’d be wrong. You see, I also own a computer that runs the Windows operating system published by Microsoft (not because I necessarily want to, but because I have to). I used to own a Palm, Inc. (Nasdaq: PALM) Treo smartphone, too.

I’m not going to write another article that’s solely a comparison of Apple’s products to its competitors. There are plenty of writers out there doing that already.

Besides, Apple is so far ahead of its competitors in product design and functionality that it’s hardly worth the comparison, except in a few cases.

But what about Apple as a company? What sets it so far apart from others in the consumer electronics sector? More importantly, how is it as an investment? Is it far ahead there as well? The short answer is a resounding “yes.”

The company rarely fails to disappoint, both on the design side and especially when it comes to revenues and earnings. The company takes a lot of heat from analysts due to its conservative stance when it comes to forecasting revenues and earnings.

But which would you rather have? A company that makes wild forecasts and rarely meets them, or one like Apple that consistently beats them? I know what makes me feel better (analysts are just like you and me in that regard).

The Mt. Everest of Cash Piles vs. Mounting Debt Pile

Apple’s balance sheet is the envy of Wall Street: It’s sitting on a mountain of cash – north of $31 billion – and not one shred of debt. An enviable position anytime, but even more so in the current recessionary climate.

Palm, on the other hand is sitting on a pile of mounting debt, and if its current losses continue, it will soon be faced with raising more cash. Not a good thing if you’re a Palm shareholder.

Here’s the bottom line on Apple as an investment: If you’d bought a few shares of Apple as a Christmas present for someone back in December 1980, they’d be your best friend. The stock has climbed 4,463% since then.

But they would be calling you names had you bought them a few shares of Palm, which has declined 97% since March of 2000 (its public debut).

How Does Apple Do It?

Ok, I’ll forget the product comparisons, but just consider these incredible facts:

• Forget the fact that its iPod has dominated the portable music player market, completely changing the way music is sold at the retail level…
• Forget for a minute that its computers command a significant price premium over similarly configured Windows machines…
• Forget that so many mobile phone companies came before it, with pricing plans cast in stone…

The company’s management is the proverbial outside-the-box thinkers:

• When Apple decides to enter a particular space, and introduce its initial product, it nearly always changes the ground rules, completely upsetting the apple cart for its competition.
• And just when a competitor thinks it has Apple’s product strategy figured out and manages to introduce a “me-too” widget, Apple introduces a faster, better one with even more features that customers want.

Notice I didn’t say cheaper: There’s never been a company in modern history that’s monetized great consumer product ideas the way that Apple has. I defy you to name one that’s done it as well.

The best part about Apple is that every time a new would-be competitor comes along, the mainstream media hacks decry “the next iPod killer,” or “the iPhone has run out of steam.” Nervous investors sell, and long-time Apple shareholders just buy their shares.

Palm’s Pre: The Next iPhone Killer? You’ve Got to Be Kidding…

Right… The latest “iPhone killer” was supposed to be the new Pre smartphone, introduced with much fanfare by Palm this past January. So where is the Pre now?

Judging from Palm’s latest anemic sales numbers, the Pre’s going nowhere fast. Even faster than most analysts estimated. So it’s not surprising that investment firms are starting to reverse course on Palm. Morgan Joseph recently downgraded Palm to a Sell rating, stating Palm is failing to meet even the lowest sales numbers for the Pre.

In a last ditch attempt to save it, I expect Palm to announce pre-holiday price cuts to try to spur sales. It won’t work, of course, and the Pre will go the way of Microsoft’s Zune music player… down and out of the picture.

Morgan’s sell target is $7.50 a share, and with Palm shares currently trading in the range of $13, shorting the stock seems like a viable idea for those investors wanting to capitalize on the negative aspects of Apple’s rising dominance in the smartphone market.

iPhone: It’s Already the Smartphone Gold Standard

The iPhone on the other hand, is so popular, during its recent earnings conference call, Apple announced that it’s having trouble keeping up with demand.

It’s no wonder: There’s more than 60,000 applications available for the iPhone, from seeing the weather where you’re standing, to reading MRIs on the golf course, and just about everything in between.

When it first came out, few analysts gave the iPhone a chance against Research in Motion’s  (Nasdaq: RIMM) very successful BlackBerry devices. But that, too, is rapidly changing, as Apple is making significant inroads into the educational, corporate and government smartphone markets.

Now Apple’s competitors are starting the all too familiar “me-too” look alike product changes. Flattering, but futile. I predict that Apple’s iPhone will continue to gain market share, and in a few short years, relegate most of the competitions devices to also-ran status.

And you just might want to be along for that ride.

Good investing,

David Fessler
Investment U

Blockbuster, still king of brick-and-mortar rental stores, learned first hand the threat an innovative upstart can pose when it ran up against Netflix’s DVD-by-mail business model.

With movie theater tickets costing upwards of $10 (and that’s not including the popcorn or sodas), Netflix’s $8.99 1-DVD plan with unlimited exchanges and streaming video access represents a decidedly better deal for consumers that are tightening their spending amid rising unemployment and waning confidence.

Netflix celebrated its 10 millionth subscriber in February, noting that it added more than 600,000 net subscribers since the beginning of the year. In its second quarter ended June 30, Netflix said it had a total of 10.6 million subscribers, with paid subscribers representing 98% of the membership. The company expects its total membership to rise to between 11.6 million to 12 million by the end of the year, upping its previous quarter’s guidance of 11.2 million and 11.8 million.

Churn, a measurement of customer cancellations, rose to 4.5% in the second quarter from 4.2% a year ago, Netflix said.

“It could be the economy,” Netflix Chief Executive Officer Reed Hastings said of increasing churn in an interview with The Motley Fool. “It could also be that we make it very easy for subscribers to put their accounts on hold if they go on vacation or don’t have enough money for a month or two. When a subscriber goes on hold, we count that as a cancellation. What you can look at – as a good stable indicator – are net additions. And net additions continue to grow.”

Netflix’s top and bottom lines continue to grow as well. Revenue grew to $408.5 million in the second quarter, up from $337.6 million in the same period a year ago. Profit grew to $32.4 million in the second quarter, up from last year’s $26.5 million.

As subscribers, sales and profit rise, so too does Netflix’s stock. Shares of Netflix have jumped more than 45% since the start of the year, and managed to sidestep the doldrums experienced by the markets in March.

Still, it’s no time for Netflix to rest on its laurels, lest it suffer the same fate as Blockbuster. That’s why CEO Hastings is quietly preparing for the death of DVDs themselves. Ultimately, consumers will one day dump the plastic discs in favor of movies delivered straight over the Internet, Hastings told The Wall Street Journal.

So Hastings, who is a self-proclaimed student of companies that stumble by failing to adapt to technology shifts, is quickly trying to shift Netflix’s business so that more videos are available online.

While Hastings is having success in getting Netflix instant video onto devices, the biggest challenge facing his company is convincing Hollywood executives to license their content. While 12,000 choices may seem like a lot, many are older AAA movies or TV shows, or newer movies that weren’t commercially successful. New releases of hit movies usually take months or even years to appear in Netflix’s streaming video catalog.

That’s because Netflix is competing with pay cable channels such as Time Warner Inc.’s (NYSE: TWX) HBO and Viacom Inc.’s (NYSE: VIA) Showtime, which gain exclusive rights to show movies and generally have larger audiences. To get the movies and TV shows consumers want, Netflix will have to boost its licensing spending from the roughly $100 million it spent last year, an anonymous source told The Journal.

“Netflix has yet to show that it has the resources and profitability to be in the markets where licensing is the business policy,” said Warren Lieberfarb, former head of Time Warner’s Warner Bros. home video division.

The company has had some success in the licensing department earlier this year when it inked a deal with Liberty Media Corp. (Nasdaq: LMDIA) to show movies from its Starz pay cable channel.

Netflix’s library of 100,000-plus DVD titles is made possible by the “first-sale doctrine” of U.S. copyright law, which allows buyers of DVDs to lend them out without the consent of studios.

Too Little, Too Late?

It’s difficult to say when Blockbuster’s fall from grace began, but it was somewhere between its well-publicized late fee fiasco and the proliferation of Netflix.

Blockbuster’s operating income at the end of its second quarter in 2004 was $105.3 million. That was just before Netflix entered mainstream consumer consciousness. Blockbuster’s operating income at the end of its second quarter this year was a loss of $1.5 million.

In spite-of an 8.3% industry-wide increase in rental revenue, Blockbuster’s revenue fell 13.3%.

The company blamed the drop partly on reduced inventory as it tries to generate more cash to handle its debt load, the Los Angeles Times reported.  Although Chief Executive Officer Jim Keyes told analysts in a conference call a renegotiation of a revolving line of credit meant stores would be fully stocked and more aggressively marketed, he admitted last week that didn’t happen.

“Temporarily during the first and second quarter, we put our plans for increased availability on hold,” Keyes said on the call. “We made this change with the recognition that we were also facing new and very aggressive competition who are better capitalized and would likely take share from us as we pulled back.”

Still, Blockbuster is doing everything it can to stay afloat, from closing stores to kiosk deployment.

“We’re deploying as many as 10,000 vending machines by the middle of next year,” Keyes told Bloomberg News in a telephone interview, adding that his company is focused on increasing cash flow rather than boosting sales in a “very challenging credit market.”

Blockbuster’s $250 million revolving line of credit is due on Sept. 30, 2010, and the company has more than $350 million of long-term debt outstanding that it must pay by the end of next year, according to a research note written by Wedbush Morgan Securities Inc. analyst Michael Pachter. Blockbuster had $99 million in cash and equivalents as of July 5, down 36% from $154.9 million on January 4, Pachter said.

“[Blockbuster needs] the credit markets to loosen up and they need to refinance,” Pachter told Bloomberg. “They’re not on track to repay this debt in the time frame they need to, so they’ve got to extend the terms.”

Pachter downgraded his rating on Blockbuster stock from “outperform” to “hold” last week. Blockbuster shares have tumbled more than 44% since the start of the year.

The Little Red Box That Could

Blockbuster was effectively rendered obsolete by Netflix’s quick response to changing technology. But Coinstar Inc.’s (Nasdaq: CSTR) Redbox Automated Retail LLC, which offers consumers new release DVDs for $1 per night, is hoping to avoid a similar fate.

Kiosk vendor Redbox, initially funded by McDonald’s Corp. (NYSE: MCD) and Coinstar in 2002, saw Coinstar acquire its remaining shares in February. The company’s $1-a-night DVD rentals are found in places like McDonalds restaurants, grocery stores, and numerous locations owned by retail giant Wal-Mart Stores Inc. (NYSE: WMT) that that serve at least 15,000 customers a week.

Redbox plans on having 21,000 to 22,000 kiosks throughout the United States by January, up from 13,700 a year earlier. The company’s sales, which were $188.9 million in the second quarter, account for 57% of Coinstar’s overall sales, up from 41% in the same quarter last year. Coinstar’s stock has risen more than 62% since the beginning of the year.

At a time when consumers are strapped, Redbox is perfectly positioned for those looking to save money. But now Hollywood is looking to stunt Redbox’s growth.

Tinseltown accuses Redbox of depressing DVD prices and depriving studios of the same revenue-sharing opportunities they now enjoy with traditional DVD rental houses such as Blockbuster, Reuters reported.

Three studios – News Corp.’s (Nasdaq: NWS) 20th Century Fox Home Entertainment, Warner Bros. and General Electric Co.’s (NYSE: GE) NBC Universal – are vowing to withhold their DVD distribution to kiosks like Redbox until 28 days after they are released.

To counter, Redbox has filed a lawsuit against at least one of the studios, 20th Century Fox. 

“At the expense of consumers, 20th Century Fox is attempting to prohibit timely consumer access to its new release DVDs at Redbox retail locations nationwide,” said President Mitch Lowe. “Despite this attempt, Redbox will continue to provide our consumers access to all major new releases including 20th Century Fox titles at our more than 15,000 Redbox DVD rental locations.”

Speaking to the LA Times, Lowe said Redbox isn’t a threat to Hollywood, but instead an additional source of income. However, Papi Capital analyst Richard Greenfield disagrees, writing that Redbox’s pricing is a “substantial risk” to the movie industry.

“It sets an ultra-low price point for movie content that will impact consumers’ decision-making process about all forms of movie-related commerce – theater-going, DVD purchase, video-on-demand," Greenfield wrote.

Of course, distribution withholding and lawsuits aside, if Netflix’s Hastings is right and DVDs do walk the path of oblivion like CDs are now, Redbox will need to adapt and find a way to enter the already-crowded Internet video market.

By Bob Blandeburgo
Money Morning

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Usually, the two don’t go hand-in-hand – especially not in the small-cap sector.

But that doesn’t mean to say that it’s impossible to grab the best of both worlds.

If you’ve read my columns here or in our monthly Xcelerated Profits Report newsletter, you know that I focus on the small-cap space – both in my specialist areas of healthcare and biotech and other sectors, too.

Typically, these small-cap stocks are ripe for big gains more so than income through dividends. But I’m actually a big fan of dividends, too.

So what if there were a way to load your portfolio with outstanding profit potential and generate income, too? There is – and I’ve got three stocks below that can do the job…

Digging For Dividends

I’m not a market timer so I’m not going to tell you that now is the time to get out of equities before the market turns lower.

But what I will say is that with the Nasdaq and Russell 2000 (small-cap) indexes having blasted off their lows by 58% and 67% respectively, it makes sense to get a bit more defensive.

The reason is two-fold – and very simple: Owning dividend-paying stocks generates income and improves a portfolio’s return over the long-term.

However, it’s hard to find good small-cap companies that pay dividends. Smaller companies usually pour any excess cash back into the business to help it grow, rather than distributing it back to shareholders.

In fact, of more than 7,400 stocks with market caps under $1 billion, only 1,356 pay dividends. And if you want a meaningful dividend yield – let’s say 3% – the number decreases to less than 800.

I further whittled down the list to companies with high current ratios, low debt, and profit expectations to help ensure that dividends would continue to get paid.

I also stayed away from companies that paid a very high dividend. Companies with yields approaching 10% or higher may find those payouts unsustainable if business continues to be difficult.

Yes, if you want a higher potential reward, you do need to take on more risk. But buying stocks with sky-high dividends is riskier than those with solid but more sensible yields.

Here are three of the best from my small-cap dividend stock screen…

A Trio Of Small-Cap Dividend Stocks

• WD-40 Company (Nasdaq: WDFC): The company makes everyone’s favorite industrial lubricant – WD-40 – plus household cleaners and other products. Through the first nine months of its fiscal year, it generated $18 million in profits and boasts $36 million in cash versus $21 million in debt. Earnings per share are expected to grow 13% in fiscal 2010.Current dividend yield: 3.4%

• American Ecology Corporation (Nasdaq: ECOL): The firm handles America’s hazardous waste. Not a great business if you’re the guy with the rubber gloves moving barrels of the stuff. But not bad if you’re an investor – particularly a new one, given that the shares have endured a beating over the past year.ECOL is profitable, has $24 million in cash and no debt. Over the first six months of 2009, it generated $17 million in cash from operations. So far it has paid out over $6 million in the form of dividends.

  Current dividend yield: 4%

• CDI Corporation (NYSE: CDI): The company provides engineering and information technology staffing services. With so many businesses cutting jobs, it’s had a tough time over the past year. But it’s still profitable, with earnings per share expected to nearly double next year. It has $77 million in cash, no debt and generated $10 million in cash from operations.Current dividend yield 3.6%.

If you have any small-caps paying dividends in your portfolio, use the “Comments” link below to let me know which ones are your favorites and I’ll run a follow-up column, featuring stocks sent in by readers. Be sure to tell me why you like the stocks, too.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld
Smart Profits Report

Steel maker Nucor Corp.’s (NYSE: NUE) stock has rallied some 51% from its March 3 low of $29.84 a share and has twice bumped against its recent high of $49.91 a share. 

The stock is still a far cry from its record-high level of $83.56, but is only 0% below its 52-week high of $53.46.  Much has changed since then, as the U.S. auto industry is no longer producing the 16 million cars it produced in 2007, nor the 13 million it managed to sell last year.  This year we are looking at some 10 million units sold, according to J.D. Power and Associates, the leading forecaster in the industry.

But there is encouraging news:  The very quick restructuring of both General Motors Corp. (NYSE: GRM) and Chrysler Group LLC, the U.S. Federal Reserve’s efforts to stabilize the financial markets, and the U.S. government’s fiscal stimulus plans have helped keep the economy from falling into a depression.  The Fed’s support for the auto industry included buying auto receivables under the Term Asset-Backed Securities Loan Facility (TALF) program, in order to restart this type of securitization.

Therefore, the paralysis of sales that we saw late last year, when the financial system froze and there was no financing available, has subsided and sales are increasing.  In fact, J.D. Power expects U.S. vehicle sales to increase to 11.5 million units next year, a full 15% pickup from projected 2009 levels. 

In fact, we are already seeing an increase in auto sales already, thanks in no small part to the government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers.” So far, CARS has spent some $1.29 billion and Congress has expanded the original $1 billion authorization by another $2 billion. 

Total light vehicle sales for July were just shy of 1 million units, a milestone the industry hasn’t topped since August 2008, mostly due to the program’s success.

This shot in the arm on the back of the general cost restructuring that Ford Motor Co. (NYSE: F) is carrying out under Allan Mulally has already prompted Ford to increase production of its Focus model. 

Similarly, Chrysler has reported that it is running two plants in overtime and a third shift at another plant just to keep up with demand.  And GM, which is seeing a huge rebound in sales, will add to this by increasing advertising spending and selling new cars on eBay Inc.’s (Nasdaq: EBAY) popular online auction Web site. Most of Wall Street is in “wait-and-see” mode, which gives us more of an incentive to jump in.  But the steel story is not just about cars.

Nucor will not only profit from the remaining $1.75 billion to be deployed through the government’s cash for clunkers program and the general improvement in market conditions, but on the pick-up in government construction in the United States that will result from U.S. President Barack Obama’s massive fiscal stimulus.

Additionally, the company will benefit from the already massive stimuli being deployed in China, Brazil, India and Russia.  And let us not forget Europe, where the European Central Bank will soon consider raising its benchmark lending rate to 1.25% from its current record low of 1% in order to prevent inflationary expectations from building up.

China will achieve more than 8% growth this year, driven by public spending, especially in construction and a strong pickup in auto sales  (up 63.6% in July from a year earlier) and domestic appliances.  All of these have a very high content of steel. 

Similarly, India’s gross domestic product (GDP) will grow by more than 6%, barely down from last year’s 6.7% expansion. Auto sales in India jumped 18% last month.  Remember that India’s Tata Motors Ltd. (NYSE ADR: TTM) launched the cheapest car in the world last January and this is likely to work wonders in today’s budget-conscious market.

So what about Nucor itself?

The company reported a second quarter loss of $133 million, which improved over the first quarter’s $189 million loss.  But the key is that volumes are already turning around.

Volumes increased 11% in the second quarter, which allowed the company to increase its capacity utilization from 45% to a still very low 46%. 

And this is where the upside lies. 

In capital-intensive industries like steel, the very high fixed costs induce very large swings in profits, depending on volumes.  And not only did Nucor see its volumes pick up in the second quarter, the trend should continue accelerating in the third quarter and beyond, thanks to the recent burst in car sales and increased government infrastructure spending.

In addition, prior to the cash for clunkers program, Nucor announced it already expected to see an improvement in its third-quarter results. The company said that many of its customers had run their inventories too low and would need to replenish them just to meet demand.

So, at reporting time, investors could be very positively surprised by Nucor and many other companies in the sector, which will provoke many analysts to increase their stock targets.

And to make the whole story even better, we are counting on increasing inflationary expectations and a weaker dollar, which will continue to drive portfolio managers to hedge this risk in commodity stocks. 

That means Nucor, which has been bumping into strong resistance levels since the beginning of January, but making higher lows in every subsequent correction, is likely to break out of its current range with an explosive rally before it even reports third-quarter earnings. 

Nucor stock closed down 92 cents, or 1.93%, Friday at $46.79 a share.

Recommendation: Buy Nucor (NYSE: NUE) at market (**).

 (**)  Special Note of Disclosure: Horacio Marquez holds no interest in Nucor (NYSE: NUE).

By Horacio Marquez
Money Morning

P.S. 10.1 Million Ounces of Gold Just Discovered

Just recently this renegade geologist and his “mom-and-pop” company hit pay dirt. Big time. They discovered a mother lode of 8.4 million ounces of gold on their mining property.

And on June 2 they confirmed another discovery of 2.2 million ounces – just 1,200 meters away. In all, this small company is now sitting on 10.6 million ounces of gold.

This strike is about to go on record as the biggest gold find in Canadian history – and the 7th largest in all of North America. It’s worth an estimated $10.1 billion in U.S. currency.

Few know about this company yet, and its stock is currently selling for around $7 – yet the gold alone is worth six times that. It’s a unique opportunity to post some significant returns in a short time. Our resource expert Peter Krauth has the full story.

Just go here. The economics of this situation are truly amazing…

Sincerely,

Mike Ward
Publisher, Money Morning

P.S.S. The window to get in on this short. Once the Canadian government filing NI 43-101 gets out – which verifies the strike – others will be clamoring to get in.

Just go here to see it for yourself.

But now the stock market’s on the mend. In my book, a 49% rally off the bottom for the S&P 500 qualifies as healing.

The economy’s showing signs of improvement. First-time jobless claims have dropped more than 15% since peaking in April.

As for the M&A market, well, it’s still suffering…

Through the second quarter, volume dropped 40.2% worldwide. Deals involving U.S. companies fared worse, dropping 57.5%, according to Thomson Reuters. And July marked the first month in over a decade when not a single deal worth $5 billion or more was announced.

But if you’re serious about investing, you need to know when the M&A market is on the upswing and should be tracking it religiously.

Why?

Because nothing causes stock prices to rise faster and further than an unsolicited takeover offer.

In fact, if we invest in a company before a deal is announced, we stand to pocket an average gain of 43.5% to 53.7%, according to the numbers crunchers at FactSet MergerStat. In a single day! No other investment strategy can boast the same lightning fast rewards.

Tracking M&A Market Activity With High Credit Spreads

If you’re looking for one number to predict a full-blown rebound in M&A market activity – and signal the best time to invest in takeover targets – try high-yield credit spreads. The spread is simply the difference in interest rates between junk bonds (the typical vehicle used to finance M&A) and comparable U.S. Treasuries.

• When the spread is high – above the historical average of 590 basis points – it means banks consider the risk of lending to suitors to be above average. In turn, they compensate for the higher risk by charging higher interest rates, thereby choking off M&A market activity by making financing too expensive.
• On other hand, when the spread is below the historical average, it means banks consider the risk of lending to be low. In turn, they charge lower interest rates, which encourages M&A activity as companies capitalize on the cheap financing to go on buying sprees.

Right now the spread stands at 857 basis points. At first blush that seems terrible, until you look at this chart.

http://www.investmentu.com/images/iu081209chart.gif

Following the collapse of Lehman Brothers, spreads hit a high of 2,180 basis points! So we’re actually down 61% from that level, with momentum squarely on our side.

As this trend continues, financing will become more affordable. In turn, I expect M&A market activity to come roaring back.

The markets remained littered with historic values. More importantly, there’s a mountain of cash waiting to be leveraged and put to work.

Private equity funds alone are sitting on $1.02 trillion in dry powder, according to London-based research house Preqin. Almost half of that – $472 billion – resides in buyout funds. If they don’t find it a home (i.e. – start buying companies), they’ll be forced to return it to investors.

How to Play The Imminent M&A Market Rebound

In previous columns on the takeover boom, I explained my strategy for uncovering the market’s most promising takeover targets and highlighted sectors and companies ripe for the picking.

However, if you’re looking for a more conservative way to play the imminent M&A market rebound, and the acquisitive nature of private equity funds, consider The Blackstone Group (NYSE: BX).

Here’s why…

• Private equity firms typically enjoy the best returns from investments made in a down market. And Blackstone’s sitting on a $26 billion cash pile to take advantage of all the bargains and practice its expertise in distressed investing, deal making and restructuring.
• Sure, other options exist to get exposure to the private equity space and the M&A market, namely Fortress Investment Group, LLC (NYSE: FIG) and Och-Ziff Capital Management Group (NYSE: OZM). But neither stack up to Blackstone in terms of experience, expertise or financial resources.
• Plus, by investing in Blackstone you get a portfolio of companies that are much healthier than the market. Roughly two-thirds of the companies will report positive or flat earnings, compared to just 35% for the S&P 500. And almost no debt is coming due until 2013, eliminating the refinancing risk plaguing countless other businesses.

Tack on an annual stock dividend of $1.20 (equivalent to an 8.4% yield) and this is a no brainer. You’ll get paid to wait for the M&A activity to rebound and the Buyout King to get back to buying.

Good investing,

Louis Basenese
Investment U

It works in any market too.

Folks have used it to make fortunes during economically good times and during tough times like the Great Depression and the 1970’s.

Most of the wealthiest people in the world have used it. In the Forbes Top 10 you’ll see Bill Gates, Lakshmi Mittal, Karl and Theo Albrecht, and Ingvar Kamprad. They all used it to amass some of the largest fortunes in the world.

On top of that, it has nothing to do with the daily market ups and downs. There’s no complex, high-risk leveraged trading strategy which require good time and better luck. And you don have to worry about timing a “true” bottom in the markets to use it profitably.

It’s much, much simpler than that.

Sounds pretty good right?

Well it is. But still, 99% of investors never use it.

Today we’ll go over this strategy which has created the greatest fortunes in the world. How you can use this time-tested strategy too. And the one industry where you can use it to double your money and probably make a lot more in the years to come. Let me start at the beginning though.

The Key to Exponential Growth

For true long-term investors, the simplest way to make an absolute fortune is to find companies that are growing market share in a growing market.

It’s one of the few ways to score exponential gains in stocks.

Think of a market for a product that is $10 billion. It’s expected to grow to $20 billion over the next decade. There are five companies with $2 billion in annual sales each (20% market share). All of the companies’ sales will double if their market share stays the same. All is good.

Of course, that’s not how it really works. As an industry grows, there are inevitably winners and losers. And the company that is able to grow market share in the growing market will see exponential growth.

For instance, in the example above, if a company that was able to snag 30% market share would have $6 billion in annual sales. That seemingly small difference in market share is the difference in annualized revenue growth of 7.1% and 11.6%. That’s going to make a big difference when it comes to margins, earnings, and will justify a premium valuation for the company’s shares.

That’s just a hypothetical example though. In the real world, it can actually be much more exciting.

Think about how the richest entrepreneurs made their fortunes. They found a market that was growing, found a way to gain ever greater share, and made a fortune.

For example, Ingvar Kamprad, the founder of IKEA, didn’t invent furniture. He merely found a segment of the furniture market no one else was catering to. In this case, it was on the very low end. He created extremely inexpensive, yet fashionable furniture and steadily took market share away from everyone else on his way to a true fortune.

Then there’s the classic example of Bill Gates and Microsoft. When Microsoft was founded, the operating system market was highly fragmented. Most major players were working with single-digit shares. Over the next 20 years, the market for operating systems grew quickly and Microsoft became a market leader with 90%+ share of the market.

There are plenty of other examples. Think about how the leaders emerged in autos, soft drinks, razors, etc.

Now, I realize, long-time Prosperity Dispatch readers know how companies are taking advantage of this downturn to expand market share.

The key here is that this strategy is simple. It’s easy to understand. Better yet, it’s easy to execute. It’s a two-step process, 1) Find a growing industry, 2) Find the winners.

Right now, one industry is set to see exponential growth over the next three, five, and 10 years, but most investors have quit paying attention.

I’m talking about autos.

Expanding Market…Check!

That’s right cars, trucks, etc.

You see, the auto industry is going to be a massive one. It’s tough to imagine it now after GM and Chrysler fell into bankruptcy, Ford (NYSE:F) is barely hanging on, and it takes another $3 billion in government handouts to get willing buyers into dealer showrooms. But the auto industry has years of growth ahead of it.

You see, U.S. auto sales are expected to hit 10.5 million vehicles this year (with the help of the “Cash for Clunkers” deal). That’s 39.5% below the 17.35 million sold in 2000. The real opportunity – as it is in most industries – is found outside the United States.

It’s going to be the emerging markets which drive the real growth in the years ahead. Now, I realize India’s Tata Motors (NYSE:TTM) attracted a lot of attention when it unveiled its $2,500 Nano – the “Model T” of India.

The real attention though should have been paid to the numbers. As you can see in the table below, they’re staggering:

As you can see, U.S. auto sales are in decline while auto sales in India and China are absolutely soaring. Also, with global auto sales expected to be 22% higher than 2000 levels, it’s clear to see how soaring demand in these countries can easily offset the decline in U.S. sales.

The second step is to figure out how to profit from it. Frankly, this is not 1920 and you’re not going to make a fortune investing in auto stocks. You have to find the segment within the overall auto market which is growing and go there.

Expanding Market Share…Check!

That’s going to be hybrid and electric vehicles. They’re going to be the big winners in the race for market share.

The tide is already starting to turn. In 2006, there were 384,000 hybrid vehicles sold. More than 1 million could make their way off the production line by 2012. And, according to Advanced Automotive Batteries, 2 million battery powered cars will roll off the lines worldwide in 2015.

J.D. Power estimates that “hybrids will account for seven percent of the car market in 2015—up from 2.2 percent in 2007.” That’s more than enough growth to offset the decline in the overall market in the U.S.

But that’s not the real exciting part. Consider if the7% market share J.D. Power expects hybrids and electric vehicles to reach in the United States happened across the world. Granted it would take a bit more time, but even if annual auto sales stay steady at 48.19 million (granted, not too likely, but let’s be conservative) there would be 3.3 million hybrids produced annually.

Now, I don’t expect there to be too much gains to be had from investing in the major automakers. These behemoths are too big to notice one or two winning product lines even in hybrid and electric vehicles.

The best way to profit from the growth of these vehicles will be from the battery makers. The hybrid and electric vehicle battery market has years and years of stellar growth ahead of it. It’s simply a case of expanding market share within a growing market.

Advanced Automotive Batteries expects, “The corresponding [hybrid electric vehicle]-battery market, estimated at $600 million in 2006, is expected to grow to $1.4 billion in 2010 and $2.3 billion in 2015.” That’s an annualized growth rate of 10.9% for just the U.S. and any additional international sales – which will be big – will add significantly to that double-digit growth rate.

Reality vs. Perceived Reality

Quite frankly, there isn’t too much to be excited about in the current markets. Stocks have had a good run. Shares in the companies which rallied hard because they didn’t go bankrupt are running out of gas.

Now, it’s time for reality to set in. And when it comes to reality, you have to look for the truly great opportunities. The ones you can get excited about. The ones you could truly make a fortune off of.

That’s where these batteries come in. The moderate growth in the auto industry turns off a lot of investors. Three or five percent growth just isn’t much. But when you add a technology with a growing market share to the mix, you get the kind of growth that is worth paying close attention to.

We’ve seen it happen time and time again. When a company or technology gradually takes over market share in a growing market, a fortune is sure to follow and it’s one of the big opportunities we’re tracking in our premium advisory service (Special 60% off introductory offer still available).

So when the whole financial world eagerly awaits the Fed’s next move and over-analyzes every word from Bernanke, they’re likely passing up some of the truly great opportunities.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

But given the economy’s strong performance following the financial meltdown that crushed economies the world over, it looks like Brazil’s time is now.

Brazil’s gross domestic product (GDP) contracted 0.8% year-over-year in the first quarter and 0.8% from the fourth quarter. That beat analysts’ expectations but wasn’t enough to keep the country from sliding into its first recession since 2003. However, the economy is already showing signs of recovery and many economists believe Brazil is already on the rebound and poised for a strong second half.

Brazil’s GDP likely grew 2.2% in the second quarter compared with the previous quarter, according to a report by Bank of America Corp. (NYSE: BAC).

Nelson Barbosa, Brazil’s economic policies minister, optimistically told the Rio de Janeiro-based O Globo newspaper that Brazil’s economy will grow by 4-5% this year.

That kind of optimism in July helped Brazil’s benchmark Bovespa stock index book its best monthly gain since 1998.  The index jumped 2.3% to 55,997.81 – its highest level in 11 months. It’s up about 50% this year, outpacing even the red-hot MSCI Emerging Markets Index. The Dow Jones Industrial Average and S&P 500 Index are up just 5.8% and 11% respectively.

Analysts that were skeptical of Brazil’s economic growth in the heady years leading up to the financial crisis pointed to the country’s supposed reliance on high commodities prices and exports.

No doubt, the country benefited a great deal from the commodities boom that drove up prices for Brazilian exports like iron ore, steel, and soybeans. But in eviscerating commodities prices and ravaging the market for exports, the financial crisis demonstrated that Brazil is more than a one-trick pony.

Sublime political stewardship leading up to and during the crisis kept Brazil’s economy well intact when global economy seemed to be falling apart. Stringent financial regulation shielded Brazil from the worst of the financial crisis, while government tax cuts and a growing middle class buoyed the country’s economy as exports dried up.

Back to the Future: Brazil’s Troubled Past Preserves its Present

Indeed, the very financial crises that had Brazilians believing their country would never find its place among the world’s elite economies endowed the nation’s policymakers with a streak of caution as they entered the 21st century.

“We are used to dealing with challenging environments, for our institutions and our regulations,” Alexandre Tombini, director for regulation at Brazil’s central bank, told the Financial Times. “Everything we have done since the mid-1990s has tended to take a more cautious approach.”

For instance, banks in Brazil are required to keep capital reserves that equate to at least 11% of their total assets. That’s high by most international standards, but many banks maintain capital ratios of 16% or more.

Banks are also required to keep 30% of all deposits at the central bank. That makes borrowing more expensive, but it also made it possible for Brazil’s central bank to dole out $51.4 billion (100 billion reals) overnight to ensure banks were adequately funded. 

Brazil’s high interest rates are another reminder of the hyperinflation that overwhelmed the economy in the 1990s. But those rates also kept lenders from getting carried away, and now that the crisis has subsided, inflation has been crushed and rates are plunging.

Brazil’s official IPCA consumer price index advanced 0.24% in July after posting a 0.36% gain in June, according to the Brazilian Census Bureau (IBGE). The rolling 12-month rate sank to 4.5%, down from 4.8% in the 12 months through June.

Brazil’s central bank has lowered its primary interest rate, the Selic-base rate, six times this year, with the most recent a 0.5% cut after the bank’s July 21-22 meeting. The benchmark rate currently stands at a record low of 8.75%.

With inflation subdued, most analysts believe the rate will be kept at its historically low level until at least 2010. 

"With inflation under control, I believe it will permit the Selic to be maintained at this low level until at least the middle of 2010."Alex Agostini, chief economist at local ratings agency Austin, told The Wall Street Journal. "I don’t seen any inflationary pressures on the radar. The inflation scenario is so well behaved that it could give the central bank room to make another rate cut at the next meeting, even though the signals coming from the central bank have indicated there will be a pause."

And while U.S. regulators are only now looking into the inconsistencies and manipulations wrought by irresponsible futures trading, Brazil has long held the reins tight on such activity. Short selling – selling shares you do not own – is allowed, but naked short selling – selling shares that you don’t have – is kept under wraps by fines for traders who can’t to deliver shares they have sold within three days.

Additionally, brokers in Brazil are obligated to provide information by every client. That means a Ponzi scheme like the one orchestrated by Bernie Madoff would never have worked in Brazil.

Retail Remains Resilient

Just as Brazil’s regulators have taken their cues from past mistakes, Brazil’s growing middle class – which now encompasses more than half the country’s population – has been hardened by tough times and proven resilient throughout the current crisis.

May retail sales advanced at an annual pace of 4% and June sales are expected to have increased by 6.5% year-over-year. Furthermore, an IBGE survey showed that nine out of 10 retail sectors showed month-on-month sales increases.

"Brazil has had so many crises over the years, people got used to them," David Neeleman, the founder of JetBlue (Nasdaq: JBLU), who last December started a low-cost Brazilian airline called Azul told BusinessWeek. "I don’t think they’re at all fazed by this crisis-everyone seems to be focused on buying their first car, getting their first credit card."

Credit card purchases have grown by 22% a year over the past decade, BusinessWeek reported.

However, Brazilian consumers also got a helping hand from the government, which cut income taxes and reduced levies on a wide range of durable goods.

In April, the government cut taxes on construction materials, cars, and household appliances. The end result was a 5.7% rise in spending on construction materials in May and an 8% surge in auto sales.  Rejuvenated auto sales hit a record-high 300,000 in June.

And increased sales led to increased production. Industrial output rose for the six straight month in June, climbing 0.2% on a monthly basis.

“Brazil has proved it can govern itself and keep the economy on track in very difficult times,” Riordan Roett, a professor at Johns Hopkins University’s School of Advanced International Studies, told BusinessWeek.

Buying Into Brazil

Brazil has also proven that it has a strong consumer base of its own ready and able to fuel economic growth, even as exports falter. In fact, exports account for a mere 12% of Brazil’s $1.5 trillion economy.

From 2001 to 2007, the poorest 10% of the population enjoyed a 49% increase in real income, Brazilian economist Marcelo Neri told the Miami Herald, describing what he called "Chinese-like growth."

Roughly 27.8 million Brazilians – out of a population of nearly 200 million – joined the consumer economy from October 2003 to October 2008, according to Neri.

About  8 million jobs have been created in that time, while the minimum wage has increased 45%

That makes Brazil a very attractive destination for investment.

In an April Buy/Sell/Hold column, Money Morning contributing editor and emerging markets specialist, Horacio Marquez, recommended Petroleo Brasileiro (NYSE ADR: PBR) for several reasons – the rising prices of oil in the next few years, the discoveries of large oil fields off Brazil’s shore, and increase local demand from the country’s growing population and income levels. 

Another commodity play is Vale S.A. (NYSE ADR: VALE), the world’s largest iron ore exporter and a key supplier to China’s exuberant infrastructure expansion. Vale will benefit not only from increase in demand when global economies (and trade with them) recover, but also the rebound of commodity prices across the board.

Martin Hutchinson, another Money Morning contributor, recommends Companhia de Saneamento Basico, orSabesp (ADR: SBS), which operates the water-and-sewage system for Brazil’s Sao Paulo region. Sabesp currently has a P/E ratio of 6.92.

“Now that’s a growth business, and one that’s not dependent on commodity prices,” he said.

Finally, the iShares MSCI Brazil IndexETF (NYSE: EWZ) has been recommended by both Marquez and Hutchinson. The ETF aims to measure the performance of the Brazilian equity market. It has net assets of $8.58 billion, a Price/Earnings (P/E) ratio of 12.75, and a dividend yield of 3.66%.

By Jason Simpkins
Money Morning

P.S. These investments are required by law to pay GUARANTEED CASH
Reliable income has become as scarce as water in the desert.

But there is one investment paying HUGE amounts of cash. And the payments are guaranteed by law.

In fact, the only way your cash payments can be canceled is if YOU say it’s okay to cancel them! Imagine… An investment where you decide if you’re going to make money!

But this is no fantasy. Martin Hutchinson specializes in these rare types of investments, and he’s shown a small group of people how to collect $4,000 guaranteed cash in one month. Read his report here…

But here’s the stark reality: The money Uncle Sam gets from personal taxes, payroll deductions, corporate taxes and various other duties is a little more than half of the money it’s spending. The difference (deficit) has to be made up either by reducing spending, increasing taxes, or both.

It’s an unpleasant reality, but that doesn’t mean we’re helpless against these changes.

Many don’t know why or how much our Gross Domestic Product (GDP) relates to the taxes we all pay. So let’s take a look at how it’s determined and why it’s important. And best of all, how we can even profit from these charges – I mean changes – and make money in the process.

GDP: What is it and Why Should I Care?

Gross Domestic Product – or GDP as it’s most often referred to – is the basic measure of a country’s economic performance.

It’s calculated in a number of ways. One of the most common is the total money spent to purchase the final goods, end products and services produced in one year.

It’s a very big number: In 2008, the International Monetary Fund estimated that the GDP for the entire world was $68.9 trillion. Not too surprisingly, the United States’ share is by far the largest: $14.2 trillion, or about 20.6% of the total.

• It stands to reason that if GDP is rising, economic growth is increasing, unemployment is falling and tax revenue is increasing.
• In the United States, the consumer has historically been responsible for 70% of the nation’s GDP, and that’s what’s sustained our long run of economic growth.
• But now, the consumer’s ATM is tapped out… kaput. He’s now too busy saving and paying down debt (a good thing) to be able to spend money at historical levels.

As a result, GDP – and by extension economic growth – is falling, and unemployment is rising. As a result, federal and state tax revenues are dropping.

So who or what is going to make up the GDP difference? Of course, there’s always the hue and cry of cutting government spending. When was the last time – under any administration – that you actually saw government shrink?

It’s been awhile, but I can assure you that at least at the state and local levels, government is laying off workers and tightening its purse strings. But that won’t be enough: taxes will have to rise to make up the difference.

Our Rising Tax Predicament Was Foreseen in the 19th Century

It’s interesting to note that this scenario was foreseen hundreds of years ago. You see, way back in the 19th century, German economist Adolf Wagner predicted that as societies grew more affluent, taxes would inevitably have to rise. This became known in economic circles as Wagner’s Law.

The reason is simple: A nation’s citizenry ultimately wants more of the things that only its government can easily provide. All those good schools, public order and safety, a strong military, and various public welfare services and Social Security benefits all cost money.

While I’m not a fan of big government, most of these are things the average citizen would have difficulty providing on their own.

Arguments are made all the time that as more social services are provided, there is less incentive for people to work. The reality though, is quite different.

Even when taxes rose sharply – as they did in the early part of the 20th century – from only a couple of percentage points of GDP to the current level (18%), the country still prospered.

Now they will have to rise again, to make up the gap in social service spending. Although there is much ballyhooing about it, the country will still prosper, as most people are quite comfortable from a material standpoint.

So what’s the best way to “play” the inevitable tax increase?

Three Ways To Play The Coming Tax Increase

My answer might surprise you, but I believe there are three sectors that will fill the consumer spending “deficit” and fund an economic recovery: energy, infrastructure and health care.

Both energy and infrastructure will benefit for the next several years from the billions being thrown at the sectors via the stimulus package as well as coming tax increases. We’re just starting to see the first of what will be many large highway, bridge and other infrastructure projects, as well as energy infrastructure undertakings associated with the smart grid.

Regular readers know I follow the first two very closely. Marc Lichtenfeld – an Investment U contributor you’ll be hearing a lot more from in the coming weeks – is an expert on the third. Read about Marc’s ideas on partial profit taking.

• Right now, analysts and most investors are shunning the energy ETFs, many of which are off 25% or more from their highs of last November. Of course, that’s the very reason you should consider taking a position in one.
• Specifically, take iShares Dow Jones U.S. Energy (NYSE: IYE), a fund that seeks to replicate the performance of the Dow Jones Oil and Gas Index. It includes companies in all facets of oil and gas: producers, equipment and distribution.

No one likes higher taxes, but in the coming weeks and months, these three sectors stand to benefit from the coming increase in government spending. We’ll be bringing you more on all three over next few weeks and months.

And remember, there’s always a way to make a profit.

Good investing,

David Fessler
Investment U

Heading into the all-important back-to-school and holiday shopping seasons, U.S. retailers as a group are struggling. Same-store sales among the 31 retailers that report such figures fell an average of 6.4% in the month of July, as the worst downturn since World War II continues to savage consumer confidence.

"You still have a picture of the consumer remaining under pressure and having fewer dollars to spend," Michael Dart, senior partner at Kurt Salmon Associates, said in a Reuters interview. "Every consumer group is being more practical and more budget-conscious."

The two leading indicators of U.S. consumer sentiment – the Reuters/University of Michigan index of consumer sentiment and the Conference Board’s confidence index –show that consumers are not yet ready to return to the level of extravagance that helped keep the economy humming before last year’s financial meltdown.

However, instead of creating an environment in which all retailers are wheezing – with the sickest patients on the financial sector’s equivalent of life support – there’s been a major divergence of fortunes for two main types of retailers. The discounters are faring relatively well – especially given the dour backdrop. But the high-end retailers – including some of the U.S. economy’s heavyweights – are struggling badly.

The bottom line: The retailers with the best “value proposition” have fared the best throughout the recession. With the prospect of a jobless recovery looming, that trend will likely continue for at least the remainder of the year.

Expect the health of the retail sector to be a key topic this week as the next round of corporate earnings are released – this time for Macy’s Inc. (NYSE: M), Nordstrom Inc. (NYSE: JWN), J.C. Penney Co. Inc. (NYSE: JCP), and Wal-Mart Stores Inc. (NYSE: WMT). And retail sales for July will be reported in what may otherwise be considered a relatively light week on the economic calendar.

In advance of those reports, here’s a look at five retailers who have performed admirably in this adverse economic climate.

Wal-Mart Stores Inc. (NYSE: WMT): Wal-Mart is the No. 1 retailer and the No. 1 grocer in the United States.

The Bentonville, Ark-based retailer’s “Save Money, Live Better” ad campaign began in September 2007, two months before the recession officially started. To emphasize this message, Wal-Mart has set up a “Save Money, Live Better” website (complete with testimonials of what people are doing with the money they save by shopping at Wal-Mart) and a “Live Better Index,” which includes an interactive map of the United States, and that show how much money people have saved in each state by shopping at Wal-Mart.

The result of Wal-Mart’s efforts? Holiday sales grew 7% last year, according to the Advertising Research Foundation. With the all-important back-to-school and holiday shopping seasons just ahead, the heavyweight retailer is clearly hoping to replicate that magic this year.

While Wal-Mart ceased giving monthly same-store sales results after April, its last reported quarter which ended April 30 showed a gain of 3.7% in that category. That compares with a 2% increase for the same period last year. Wal-Mart’s results for the quarter ended July 31 will be reported this Thursday.

Dollar Tree Inc. (Nasdaq: DLTR):  So-called “dollar stores” are nothing new. But when a bad economy dominates the headlines, 401ks get gutted and credit tightens, stores that sell everything for $1 are bound to attract business. Dollar Tree is one of the few retailers where same-store sales are increasing. Last week it said its same-store sales for the quarter ended Aug. 1 grew 6.8%, up from 6.5% a year ago. Its stock, which closed at $46.76 on Friday, is up about 21% in the past year.

Family Dollar Stores Inc. (NYSE: FDO): Another dollar-store star, Family Dollar last year posted the largest percentage gain of any stock in the Standard & Poor’s 500 Index, Barron’s reported. Its same-store sales for the quarter ended May 30 grew 6.2%, while profit skyrocketed 36% year-over-year. The company upped its guidance for the fourth quarter, with an earnings per share (EPS) estimate of between 39 cents and 43 cents. Since reporting that quarter on July 8, Family Dollar’s shares have jumped 13.19%.

Additionally, the discounter is adding the ability for its customers to use credit cards and food stamps in the quarter ending Aug. 29, which could erode its margin. Still, until consumer confidence gets back on track, Family Dollar is positioned to do well.

The TJX Companies Inc. (NYSE: TJX): Best known for its T.J. Maxx and Marshalls discount apparel stores, TJX is succeeding in a market where premium retailers such as Macy’s Inc. (NYSE: M) and J.C. Penny Company Inc. (NYSE: JCP) are not. TJX’s stores had the reputation of a discount clothier before the recession began, and it’s keeping the pressure on. The company’s same-store sales grew 4% in July.

Ross Stores Inc. (Nasdaq: ROST): Ross’ “Dress for Less” slogan is so important to its business, that the company displays it under the main entrance sign of each of its stores. Same-store sales in July grew 4%, after analysts forecasted just a 0.8% gain, according to Thomson Reuters. The discount apparel retailer upped its earnings guidance 52%, and now expects to earn 81 cents to 82 cents a share. It reports its results for the quarter on Aug. 18.

By Bob Blandeburgo
Money Morning

The benchmark MSCI Emerging Markets index is up 52% this year, rendering the S&P 500’s 11% uptick completely insignificant.

Thanks to the strong performance, investors’ love affair with emerging markets keeps getting steamier. Case in point – investors poured $10.6 billion into emerging markets mutual funds so far this year, a whopping 34 times the total invested in U.S. funds.

Yet, while most pundits shout from the rooftops that emerging markets are the place to invest right now, let me offer a dissenting opinion.

Three Reasons Emerging Market Investors Are Getting Dumped

Emerging markets investors – and their hard-earned capital – are about to get dumped on their derrieres. Here are three reasons why…

• Growth Doesn’t Pay

The justification for investing in emerging market stocks has always been the same – growth in emerging markets will far outstrip growth in the developed world and therefore, the profits will be greater.

After all, doesn’t it make sense that a company doing business in a country with GDP expanding at a 7% annual clip will earn way more than a company doing business in a country with GDP contracting?

Seems logical and if that’s the case, emerging markets are definitely the place to be right now. Barclays estimates developing Asian economies will grow by 5.2% this year, compared to a 2.3% contraction for the United States.

Here’s the rub: the classic justification is flawed. High economic growth does lead to higher profits for individual companies. But it doesn’t translate into higher stock returns for investors.

Based on decades of data from 53 countries, London Business School professor Elroy Dimson recently proved countries with the highest growth produce the lowest returns (6% per year), while countries with slowest growth produced the highest returns (12% per year).

How can this be? It’s simple, really. Attracted to higher growth, investors end up paying higher prices for emerging markets stocks, which cuts into returns.

Emerging Market Investors Violating Primary Rule of Investing

In other words, when it comes to emerging markets, investors lose their senses and consistently violate the primary rule of investing to buy low and sell high. And that’s certainly happening now…

• Valuations Hardly in Bargain Territory

If success in emerging markets boils down to buying in at the right price, now is not the right time.

The MSCI Emerging Markets Index trades at 17.8 times earnings, the highest level since the index peaked in late 2007. In comparison, the S&P 500 trades at 17.2 times earnings.

Moreover, the historical average for the MSCI index is roughly 14 times earnings, making current prices seem a bit stretched.

• No Safe Haven… Nasty Corrections Are the Norm

While emerging markets stocks can make you a fortune in a hurry, they can just as easily ruin you. Just consider:

• In the six weeks following Lehman’s collapse, emerging markets shed 47%, slightly more than the S&P 500 index, proving higher economic growth provides absolutely no buffer.

• After advancing more than 20% for five straight years through 2007, emerging markets cratered 53.3% in 2008. Remember, the S&P 500 “only” dropped 37.6% last year.

• In 2000, when the U.S. market slid 9.1%, emerging markets tanked 30.8%.

Emerging Markets Headed For Short-Term Profit Correction

Bottom line, I’m convinced emerging markets are headed for a short-term profit taking correction.

• Historical data proves these markets are susceptible to such sell offs.
• Valuations are getting stretched.
• And investors have never been more enamored with such stocks.
• Even the financial press can’t resist the euphoria. Yesterday, Bloomberg ran a feature entitled, “Emerging-Market Stocks to Gain Further After 52% Rally This Year.”

But make no mistake. This is a classic case of investors chasing performance. Such a strategy always fails. Or as Humphrey Neill put it in The Art of Contrary Thinking, “When everyone thinks alike, everyone is likely to be wrong.”

Don’t be everyone.

Instead, consider selling short the MSCI Emerging Markets Index Fund (NSYE: EEM).

Or at the very least, check your asset allocation.

If you’ve got more than 20% of your portfolio in emerging markets, you could be in store for a nasty setback. To avoid it, I recommend you take some profits off the table while you still can.

Good investing,

Louis Basenese
Investment U

We’ve all heard that the stock market always looks forward, never back.

You can see the proof. Just take a look at companies that recently announced great earnings, but still hedged their bets on future guidance.

The reason is that the market wants to know what’s going to happen in the future. It couldn’t care less about what’s already in the bank. Right now, the markets know one thing for sure: The U.S. Treasury is printing money and dumping it into the financial system at historically unprecedented rates in an effort to stimulate the economy.

Chances are good that the Fed won’t know when to stop the printing presses. Its thought process goes something like, “If some stimulation is good, more will be even better.” And most politicians, who are always looking ahead to the next election, won’t want to risk their futures by cutting off ANY economic aid prematurely.

But continuing to print money only exacerbates the inflation problem and deepens the hole. For example, the ratio of the U.S. budget deficit to GDP is at the highest level since World War II.

The real problem, though, is that all this economic over-stimulation sets us up for inflation. It’s something every investor should guard against. And it’s why we’ve got the best four investments for you to limit inflation’s impact.

#1: Gold – The Tried-And-Tested Inflation Hedge

These days, many think of gold as a great investment for its safety and growth. And solely based on the amount of direct-mail advertisements I get from gold bugs, you’d think it was the only investment worth keeping.

But it’s actually an effective hedge against a declining U.S. dollar and an inflationary economy. It’s why every investor should have some exposure to gold in his or her portfolio. As part of our Asset Allocation Model, we recommend 5%.

For all its benefits, there are currently two problems with the physical metal. Because it’s in great demand, it’s hard to get. Consequently, purchasing it requires a stiff premium – in some cases, a premium of 10% or more – when and if you do find bullion or coins to invest in.

A much better way is to pick up a few shares of SPDR Gold Trust ETF (NYSE:GLD), which seeks to replicate the price performance of gold bullion. Shares of GLD trade at the ratio of 10 shares to one ounce of gold.

This investment trust holds the physical metal for investors in vaults: You can see what that looks like here. HSBC Bank serves as the custodian of the trust’s physical gold and recently had to move it to a larger vault to accommodate growing investment.

#2: An Inflation-Busting “TIP”

Our next inflation hedge is inflation-adjusted Treasuries (TIPS). These investment bonds stand alone in the investment world, as they’re the only investment guaranteed to beat inflation.

Essentially, they’re Treasury bonds that hedge against inflation – the bondholder gets an interest payment twice a year, just like a standard Treasury note.

But the catch here – and it’s a good one – is that the bond principal increases each year by the amount of the consumer price index (CPI). And so does the amount paid in interest, which is exempt from state and local (but not federal) taxes.

While you can buy the bonds directly from the U.S. government or any broker, the easiest way to participate in them is through the iShares Barclays TIPS Bond Fund (AMEX: TIP).

This fund seeks to duplicate the return of the Barclays Capital U.S. Treasury Inflation Protected (TIP) Securities Index.

#3: Pump Some Energy Into Your Portfolio

Our third hedge against inflation is energy stocks.

The reason is simple: Energy figures into the cost of just about everything. And since oil and natural gas are priced in dollars, an inflationary cycle tends to raise the price of energy and energy-related stocks.

Of course, even without inflation, the long-term trend for energy prices is one way: Up. Inflation will just add fuel to an already burning fire (pun intended).

Rather than looking at individual energy stocks, however, consider a shotgun approach in the form of an energy ETF.

One we like for its low fees and solid performance is the Vanguard Energy ETF (NYSE: VDE), which seeks to replicate the performance of the Morgan Stanley U.S. Investable Market Energy Index. It’s up 36% since its March low.

Made up of a diverse group of large, medium and small cap companies in the energy sector it provides wide ranging coverage of the sector. In addition, it includes companies such as drillers, equipment providers, exploration, refining marketing and production and transport of oil and gas products.

Personally, I find energy and infrastructure some of the most interesting opportunities in the markets today. So investing in energy companies not only allows us to take advantage of the sector itself, but also protect us from inflation.

#4: Combat Inflation Through Commodities

Our final inflation-protection hedge is in commodities like wheat, cattle, fertilizer, and base metals – many of which usually rise during inflationary periods.

Until recently, profiting from commodities involved commodities futures trading – something that most people know little about. But today, investors can leave the fancy futures trading to the experts and still reap the benefits as commodities rise.

For example, the Pimco Commodity Real Return Strategy Fund (MUTF: PCRDX) invests in both leveraged and unleveraged commodity-linked index notes to match the return of the commodity futures markets.

The fund also uses other fix-income instruments like treasuries and preferred stocks to increase returns and lower the volatility that is commonly associated with investments in commodities.

So that’s it – four great ways to protect your portfolio against inflationary pressures. And as the global economic engine shifts into higher gear, it will likely become an even more significant factor.

Good investing,

David Fessler
Guest Editor for Smart Profits Report

P.S. For those of you interested in GDP Per Capita figures check this interactive site out — Click Here

And right now, biotechnology stocks are moving up faster than most anything else. Just last week Human Genome Sciences (HGSI) surged more than 400 percent thanks to successful trials of a new lupus drug.

Biotechnology is a fascinating sector, one that’s made (and lost) a lot of money for millions of investors in recent decades. That’s why, in my opinion, you should become familiar with this industry.

What is biotechnology, anyway? Broadly speaking, it’s the application of technology to biological materials — plants, animals and people. Nowadays a lot of biotechnology involves manipulating genetic material: The DNA that forms the basis for life.

The goal is to produce new and useful substances that make life better and, of course, turn a profit along the way.

Gregor Mendel —
Inventor of Biotechnology

Strangely, though, the man widely called the “father of genetics” wasn’t interested in profit at all. Gregor Mendel was a nineteenth-century Catholic monk from Brno, a city in what is now the Czech Republic.

Gregor Mendel’s pea plants were the foundation of modern genetic science.

Born on a farm in 1822, Mendel was encouraged by colleagues to improve the abbey’s gardens — a source of food for the poor as well as their own kitchens. Noticing variations in the plants, he launched a careful study to find an explanation.

Between 1856 and 1863, Mendel cultivated some 29,000 pea plants, keeping careful records to note how succeeding generations changed based on their ancestry. He published the results of his study in an academic paper that was promptly ignored by scientists of the day.

Mendel then turned his research to honeybees but found them less cooperative than pea plants. He died in 1884, probably never dreaming he would one day be called a scientific pioneer.

Modern Genetics Is Born …

Decades later, scientists rediscovered Mendel’s work and replicated his results. Twentieth-century genetic research ultimately led to the discovery of DNA and attempts to manipulate the structure of life.

The industry really took off after 1980, when the U.S. Supreme Court ruled that a genetically-altered micro-organism could be patented. With the door now open to profit, private genetic research soared.

Most people associate biotech with medicine, which is indeed a big part of the industry. But there’s a lot more, too …

Biotechnology has revolutionized the agriculture business.

• Biotechnology has revolutionized the agriculture business, leading to higher-yielding crops and more efficient animal husbandry.

• Bio-fuels, based on plants like corn or animal by-products, could someday supplement, or even replace, our dependence on oil and natural gas.

• Genetic testing can help identify people who are vulnerable to certain diseases so they can take precautions.

• Gene therapy involves the replacement or repair of defective genes and may lead to a cure for cancer and many other diseases.

• Pharmaceuticals produced through genetic research can be highly targeted toward specific conditions and are often more effective than traditional medications.

Scientists around the world are racing to make the next big biotechnology breakthrough. The winners: Consumers like you and me … we’ll enjoy better health, tastier food, and lower costs for things we buy every day.

Investing in Biotech
With ETFs …

How can you make money in biotech? Well, you could bet on any of the tiny stocks that claim to have a sure-fire winning discovery. But most of the time these bets don’t work out. You can easily lose your shirt, in fact.

A better way is to bet on the entire sector — and exchange traded funds (ETFs) are a great way to do it. Currently there are six biotech ETFs. Each has its own particular portfolio methodology. Here’s the full list:

• iShares Nasdaq Biotechnology (IBB)

• SPDR S&P Biotech (XBI)

• Biotechnology HOLDRs (BBH)

• First Trust Amex Biotechnology Trust (FBT)

• PowerShares Dynamic Biotech & Genome (PBE)

• PowerShares Global Biotech (PBTQ)

Which should you buy if you want to get involved in biotech? That’s your decision. All these ETFs have advantages and disadvantages. I’ll give you a couple of pointers, though.

Source: TradeStation

If you intend to trade actively, trying to capture the biotech sector’s short-term dips and rallies, IBB is the most liquid ETF in this space.

If you are investing for the long term, XBI has a good mixture of solid large-cap biotech stocks with promising small companies.

Remember: This is a volatile sector. Biotech stocks can make sharp moves in either direction in the blink of an eye. So don’t trade with money you can’t afford to lose.

If you’re willing to speculate, though, biotechnology can spell opportunity both now and in the future. Do your homework, and you can unlock the potential.

Best wishes,

by Ron Rowland
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

[Editor's Note: If it's inflation you're worried about - and commodities you want to invest in - there's no better place to look than the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called "Secular Bull Market" in commodities. If you're new to the commodities-investing arena, and are uncertain about the landscape - or even if you're an "old hand" at natural-resource stocks, but want some insights into the new profit plays and new players - consider hiring a guide: Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks, who is also the editor of the Global Resource Alert. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities We'll see in our lifetimes. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, Please click here. ]

After more than a year of lax monetary policy and direct capital infusions, U.S. Federal Reserve Chairman Ben S. Bernanke has finally outlined an “exit strategy” that he says will lead to the “smooth and timely” withdrawal of monetary stimulus and keep inflation at bay.

However, analysts say that Bernanke’s exit strategy is far from foolproof and could touch off an inflationary firestorm that hammers the U.S. economy, debases the dollar and sends prices soaring.

Indeed, analysts have long been concerned that Bernanke’s unprecedented effort to boost market liquidity and expand the Fed’s balance sheet would lead to a significant increase in inflation once credit markets return to normal.

The Fed has injected more than $2 trillion into the U.S. financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

The Fed has also lowered its benchmark Federal Funds Rate to a record low range of 0.00%- 0.25%.

As a result, the U.S. monetary base has about doubled during the past two years.

Bernanke acknowledged in the Federal Reserve’s Monetary Policy Report to Congress – as well as in an op-ed piece in Tuesday’s Wall Street Journal and in comments made directly to the House Financial Services Committee – that inflation poses a significant threat. But he has also made it clear that the Federal Reserve has no interest in changing the course of its policy before it is certain that a recovery is underway.

“Economic policy conditions are likely to warrant accommodative monetary policy for an extended period,” Bernanke said in the Fed’s report to Congress.

Nevertheless, the central bank leader said he is confident that when the time comes he will have the “necessary tools” to rein in inflation in a “smooth and timely manner.”

So what is the Bernanke’s exit strategy? Will it work? And what should investors do if it backfires?

A Look Inside Bernanke’s Toolkit

Bernanke has heard the concerns about inflation and this week he went a long way to address them. The Fed chairman not only addressed those concerns in his report to Congress, he penned an op-ed piece for The Journal.

Bernanke pointed out in each of those statements that some of the Fed’s emergency lending facilities automatically wind down as the economy recovers, because they have onerous pricing and terms.

Short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion from about $1.5 trillion at the end of 2008, he noted.

Additionally, Bernanke named two key measures that the Fed could take to raise market interest rates as needed and drain the central bank’s bloated balance sheet:

• Increase the amount of interest paid on balances held at the Federal Reserve by depository institutions (banks).
• Selling securities from the Federal Reserve’s portfolio with the agreement to buy them back at a later date.

The Federal Reserve last fall was granted the authority to pay interest (currently 0.25%) on the balances maintained by banks at the central bank. Raising the amount of interest paid, Bernanke argues, will give the Fed substantial leverage over the Fed Funds Rate and other short-term rates, because banks don’t typically supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve.

Basically, banks will be keener to keep their money at the central bank for a substantial, risk-free premium, than they will be to lend it out at a lower rate with a higher risk. And this can be done without draining reserve balances.

Bernanke noted that it’s common practice for many foreign central banks – including the European Central Bank (ECB), Bank of Japan (BOJ), and the Bank of Canada – to use their ability to pay interest on reserves to maintain a floor under market interest rates.

“Thus, the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the Federal-Funds Rate,” Bernanke argued in the The Journal. “Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.”

The second part of Bernanke’s exit strategy, which will be orchestrated in concert with the first, is to unwind the Fed’s balance sheet by conducting reverse repurchase agreements and outright sales of longer-term securities.

A reverse repurchase agreement is when the Fed sells securities from its portfolio with an agreement to buy them back at a later date.

“Reverse repurchase agreements, which can be executed with primary dealers, government-sponsored enterprises, and a range of other counterparties, are a traditional and well-understood method of managing the level of bank reserves,” Bernanke told the House Financial Services Committee.

Additionally, the Fed could simply sell its holdings in longer-term securities, which Bernanke says would drain reserves, raise short-term interest rates, and put upward pressure on longer-term interest rates by expanding the supply of longer-term assets.

“In sum, we are very confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability,” Bernanke told the House panel.

Exit Strategy or Inflationary Quagmire?

At face value, Bernanke’s exit strategy is entirely plausible. But that doesn’t mean it’s foolproof. There are a number of lingering questions and concerns still lingering in the minds of many investors and analysts.

First, there is a question of timing. Bernanke may have described the Fed’s tools, but he did not define the conditions that would lead to their use. That is, at what point does inflation become enough of a concern, and at what point does U.S. growth become sustainable enough, to warrant a change in Fed policy?

Bernanke sent a clear message to the market this week that he is aware of the potential risk of inflation, but he also made it clear that the economy is still in need of nursing. What Bernanke termed “accommodative monetary policy” – interest rates near zero and capital infusions through the purchase of government and mortgage debt – likely will remain the norm for the foreseeable future.

That seems fair considering that inflationary pressures have remained low, bank balance sheets are still in disrepair, consumer spending is weak, and unemployment is the highest it’s been in decade. But as the economy improves, the central bank’s policymaking Federal Open Market Committee (FOMC) will have to come to a consensus about when stimulus should be retracted and liquidity tightened.

“Because there is no clear model or indicator on what tools to exit with, that is where the fuzziness is,” Rudy Narvas, senior analyst with 4Cast Ltd. in New York, told Reuters. “If you don’t time it right, either you dip the economy back into recession, or you will fuel the inflationary fires.”

But timing isn’t the only uncertainty regarding the Fed’s plan. There are also questions about how effective the Fed’s “tools” will be.

Raising interest payments on reserves could entice banks to keep more money with the Fed, but there’s a limit as to how much money the central bank can pay out.

“There will eventually be a situation where the Fed is paying the banking system something like 5% on $700 billion of reserves,” Bank of America-Merrill Lynch (NYSE: BAC) rates strategist Michael Cloherty wrote in a research note. “That would mean the Fed would be paying the banking system $35 billion per year of what is ultimately U.S. taxpayer money in order to push up interest rates.”

Reverse purchase agreements could help trim the Fed’s balance sheet, but the primary dealers – the “government-sponsored enterprises,” and a range of other counterparties that Bernanke referred to – would have to have healthy balance sheets of their own. And so far there’s no indication that they will.

Even selling longer-term securities outright carries an inherent risk. Merrill Lynch estimates that the Fed will hold $1.25 trillion in Treasury, agency, and private mortgage-backed debt.

The Federal Reserve “can’t fob huge amounts of paper onto the market without having some seriously detrimental implications for long-term rates,” Alan Ruskin, international strategist at RBS Securities (NYSE ADR: RBS), told Reuters.

The worst-case scenario, according to Ruskin, would be if foreign holders of U.S. debt – such as China, which held $768 billion of U.S. securities in reserve at the end of March – started dumping Treasuries and the dollar, causing a currency crisis.

What to Do if Bernanke’s Exit Strategy Backfires

If the Fed is too slow in its withdrawal of “accommodative monetary policy,” or if the central bank finds itself unable to unwind its balance sheet in as “smooth and timely manner” as Bernanke anticipates, a major surge in inflation will be likely the result.

In that case, one of the clear winners would be commodities – especially gold.

“Protection from inflation is a huge benefit to commodities,” said Money Morning Contributing Editor Peter Krauth. “Specific investments would include gold, silver, oil, and copper, to name a few. All of these are valuable – and possess an actual value – which means that they will not go to zero. Since they are priced in U.S. dollars, as the dollar loses value through inflation, you need more dollars to buy the same quantity (not to mention increasing demand).”

If you’re interested in purchasing gold, you could do so by purchasing bars, or bullion, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE: GLD).

Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion. The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. However, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

Similarly, there are other commodities-based ETFs that would offer a significant return should inflation take hold.

For instance, the United States Oil Fund LP (NYSE: USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE: OIL), or the United States Gasoline Fund LP (NYSE: UGA) all offer exposure to oil and gas prices, which have surged recently on demand but are certainly responsive to inflation as well.

By Jason Simpkins
Money Morning

Roughly two-thirds of our membership is retired, many like myself at a relatively young age. Many accumulated their wealth in ways you might expect: lawyers, doctors and investment bankers. Several come from wealthy families, and are responsible for managing substantial levels of savings, in some cases accumulated over several generations.

One of the members recently confided in me that given the spate of recent bank failures and the Federal Deposit Insurance Corporation (FDIC) insurance limits, he was worried about the eight-figure sum that he had parked in certificates of deposit at his bank.

He’s a conservative investor, and invests little of his money in the equity markets, preferring the relative safety of banks. Out of respect for his privacy, I won’t divulge his profession, or the name of his bank, but suffice it to say that it’s on the list of those that received federal TARP funds a few months ago.

At first glance, you might think if his bank should fail, any funds he has over the current per-beneficiary limit of $250,000 could be at risk, especially if those certificates of deposit were all in one account.

It turns out though, my friend has a number of options, some of which he wasn’t familiar with, specifically a CDARS account. Let’s take a look at them…

Insurance Options for Investors

First, there are eight different account ownership categories recognized by the FDIC:

• Single accounts,
• Retirement accounts,
• Joint accounts,
• Revocable trust accounts,
• Irrevocable trust accounts,
• Employee benefit plan accounts,
• Corporation/partnership/unincorporated accounts
• And finally, government accounts.

Follow the link to read more about the requirements for each of these ownership categories.

Another option is to open another account at a different bank. It’s important to note, however, that a separate account at a different branch of the same bank doesn’t qualify.

For high net worth individuals, this can start to get rather cumbersome, especially from a record-keeping standpoint. For instance, an individual with $5 million would have to maintain more than 20 separate accounts in order to allow room for interest payments.

CDARS Accounts – The Best Option For Investors

The best option is the one that most investors have probably never heard of… it’s called a CDARS© account (pronounced “cedars.”) It stands for Certificate of Deposit Account Registry Service.

Not all financial institutions offer CDARS accounts, but nearly 3,000 do. They’re members of the Promontory Interfinancial Network, founded by Eugene Ludwig, former Comptroller of the Currency.

• When a depositor places a large deposit with a network member, that bank uses CDARS to place the funds into certificates of deposit issued by banks in the network. The certificate increments are less than the FDIC maximum to insure that both the principal and interest are protected.
• Other member banks then do the same thing with their customers’ deposits. The whole setup is managed by a sophisticated computer matching system, which calculates the amount of funds that are then exchanged by the member institutions.
• The funds transfer occurs on a dollar for dollar basis. What that means is that the equivalent of the customer’s original deposit comes back to the originating institution.

Banks love it, because those funds are available to them to support local lending programs, thereby building a stronger local banking community.

Once setup, a CDARS account holder can enjoy the safety of full FDIC insurance on balances up to $50 million. In addition, account holders sign one agreement, and receive one monthly statement.

Many investors won’t ever need to take advantage of a CDARS account. But for those that ultimately are faced with the pleasant scenario of a large sum to invest – and want the backing of the full faith and credit of the U.S. government – opening a CDARS account is clearly the way to go. To find out more about CDARS, you can visit their website: http://www.cdars.com

Good investing,

David Fessler
Investment U

Following Shariah law, the index excludes anything close to investing in “sin stocks” or firms that produce or market alcohol, tobacco, gambling, weapons, or pornography.

Investors are further assured that the stocks held in the index have nothing to do with borrowing or lending, women’s fashions, cosmetics, modern cinema, popular music, or pork.

Personally, I wouldn’t touch this fund with a barge pole. It is virtually guaranteed to earn sub-par returns.

Here’s why…

Investing in Sin Stocks vs. Socially Responsible Stocks

If you were given the choice six years ago between investing in the environmentally and socially responsible Sierra Club Stock Fund (Nasdaq: SCFSX) or investing in sin stocks with the Vice Fund (Nasdaq: VICEX), which invests primarily in tobacco, alcohol, defense and gambling, which would you have chosen?

I’ll give you a hint. Your profits would have been much bigger if your conscience weren’t your guide.

• The Sierra Fund has delivered negative returns over the past six years.
• The Vice Fund has delivered positive performance – and beaten the S&P 500 handily, too.

This is no aberration.

Merrill Lynch recently examined the performance of alcohol, tobacco and casino stocks in all recessions since 1970 and found that while the S&P 500 fell 1.5% on average, sin stocks rose an average 11%.

This downturn isn’t shaping up to be any different.

Sure, consumers are cutting their spending far more than in past recessions. But history shows that people do not drop their bad habits in hard times.

Rather many people feel an intense need to escape through alcohol, tobacco, or a trip to their local casino.

This is not too surprising.

If a citizen of ancient Greece or Rome were magically transported into the modern era, he would be astounded by the current state of agriculture, transportation, housing, medicine, architecture, technology and general living standards.

Humanity itself, however, would offer few surprises. We remain the flawed human beings we have always been, struggling with the same deadly sins our ancestors wrestled with millennia ago: greed, gluttony, sloth, pride, anger, envy and lust.

Investing in Sin Stocks Through The 7 Deadly Sins

Given this reality, when it comes to investing in sin stocks, four months ago The Oxford Club unveiled its new Seven Deadly Sins Portfolio.

It is already up 41%, more than 10 times as much as the S&P 500.

We locked in a 92% profit in the casino stock Wynn Resorts (Nasdaq: WYNN) in 64 days. Our shares of Smith & Wesson (Nasdaq: SWHC) have doubled in less than four months. All but one of our positions are up over 20%.

Why are these vice stocks outstripping the broad market by such a wide margin? One answer is careful security selection.

But two other studies out of Yale and Princeton offer a further rationale.

• One study attributes vice stock outperformance to the lack of attention pension and other institutional investors pay to these stocks in order “to maintain an aura of respectability.” (That creates opportunity.)
• The other believes it’s because companies in sin industries benefit from high barriers to entry, thanks to strict regulations and taxation.

These factors are not likely to change.

I’m not endorsing the sin industries, incidentally.

I don’t smoke and I hope my kids never do. I don’t gamble unless the stakes are negligible. And I don’t own a handgun, although I am a supporter of Second Amendment rights.

Why Would Anyone Invest in Sin Stocks?

So why would I consider investing in sin stocks and these types of companies?

• Because my investment portfolio is a vehicle for achieving and maintaining financial independence, not for making grand moral statements.
• Consumers and investors have every right to patronize or own any legal, publicly traded business that creates jobs, pays taxes and allows citizens to enjoy their many freedoms.
• Moreover, you only need look at Afghanistan under the Taliban to see what a society unleavened by political, religion and economic freedoms looks like.

Last month French President Sarkozy made news when he said the burqua – a symbol of the repression and subjugation of women – “is not welcome in France.”

Shariah law isn’t welcome in my portfolio either. And the returns have been superb because of it.

Good investing,

Alexander Green
Investment U

The oil giant is looking to spend more than $600 million on the research and development (R&D) of next generation biofuels from photosynthetic algae in an alliance with privately held Synthetic Genomics Inc (SGI), which was founded by genome map pioneer J. Craig Venter.

“This investment comes after several years of planning and study and is an important addition to ExxonMobil’s ongoing efforts to advance breakthrough technologies to help meet the world’s energy challenges,” said Emil Jacobs, vice president of research and development at ExxonMobil Research and Engineering Company. “We believe that biofuel produced by algae could be a meaningful part of the solution in the future if our efforts result in an economically viable, low net carbon emission transportation fuel.”

Under the program, if research and development milestones are successfully met, ExxonMobil expects to spend more than $600 million, which includes $300 million in internal costs and potentially more than $300 million to SGI.

“While significant work and years of research and development still must be completed, if successful, algae-based fuels could help meet the world’s growing demand for transportation fuel while reducing greenhouse gas emissions,” said Michael Dolan, senior vice president of ExxonMobil. “Our new algae biofuels program complements ExxonMobil’s ongoing efforts to reduce emissions in our operations and by consumers of our products, through both efficiency improvements and technology breakthroughs.”

Exxon Mobil’s collaboration with SGI will last between five and six years and will involve the creation of a new test facility in San Diego to study algae-growing methods and oil extraction techniques. After that, he said the company could invest billions of dollars more to scale up the technology and bring it to commercial production.

Neither company is making guarantees.

“We’re not claiming to know all the answers,” said Venter. “There are different approaches to what is truly economically scalable, so we’re testing things and giving a new reality to the timelines and expectations of what it takes to have a global impact on fuel supply.”

By Bob Blandeburgo
Money Morning

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I’ll believe that when I see it. When was the last time the government completed any project on budget?

And I’m not the only one with doubts.

Health Systems Innovations, a health care consultant that has worked with private health insurers, estimates that Senator Kennedy’s bill would cost $4 trillion over 10 years.

Ouch…

Should a health care plan be passed that even resembles anything like the current proposals, $2 trillion in final costs would be a minor miracle.

A trillion here, a trillion there. Pretty soon, you’re talking about real money.

As these health care reforms gather momentum, I’m going to explore a few more investments that should thrive in the face of a major health care system overhaul, regardless of any health care reform plan that may be passed…

Health Care Reform : Protecting Against Inflation With Bond Funds

Despite the President’s popularity, he’s not likely to get everything he wants. Some sort of compromise is to be expected. One thing we can assume is that the cost of any health care reform plan – regardless of whose it is – will be a 13-figure number (i.e. more than $1 trillion).

On a macroeconomic level, that would likely be inflationary and cause bond prices to decline. So if you’re a bond bear, here are two instruments for you…

• UltraShort 20+ Year Treasury ProShares (NYSE: TBT): This ETF is not for the faint-hearted. It seeks to perform at twice the inverse results of the Lehman Brothers 20+ Year U.S. Treasury Index. So if the Index drops 5%, TBT should rise about 10%.

• ProFunds Rising Rate Opportunity (RRPIX): This is a mutual fund that also seeks the inverse performance of the bond market. Its results aim to correspond to 125% of the inverse of the daily movement of the 30-year Treasury bond.

Profit From Health Care Reform with Biotech & Selling Put Options

Recently while researching stocks that would profit during the health care reform process, I discussed the attractiveness of investing in biotech companies that treat rare diseases.

One of the companies I’ve recently discussed, Genzyme (Nasdaq: GENZ), had a major setback when it disclosed problems at one of its manufacturing facilities. The stock price took an immediate hit.

I believe these difficulties are temporary and I still like the company. But if you’d prefer to reduce your risk further, you can look at selling put options on GENZ at a lower strike price. My colleague Lee Lowell just talked about a put selling strategy earlier this week.

I explained to Lee why I like GENZ, but wanted a good put-selling trade for investors who want to own the stock at a lower price. Here’s what he suggested…

• Sell the October 2009 $47.50 puts, currently trading at $1.50 on the bid. This means for every put that you sell, you will collect $150.
• Keep in mind that one put contract represents 100 shares.

• If GENZ never sees the $47.50 strike, you keep the $150.

• If the stock drops to or below $47.50 at expiration, you’ll be required to buy the stock for $47.50 (100 shares of GENZ for every put contract you sell). But remember that you collected $1.50 already, reducing your cost basis to $46 per share.

So if you like GENZ, but would prefer to own it at a lower price, this is one trade to consider.

Health Care Reform: Two Biotech Companies Set For Profits

I’ve recently suggested a few other biotech stocks to my subscribers, including:

• Best-in-class generic drugmaker Teva Pharmaceuticals (Nasdaq: TEVA).
• Another generic drugmaker to look at is Watson Pharmaceuticals (NYSE: WPI). Watson just announced its acquisition of privately held Arrow Group, a generic biotech drugmaker, with significant international operations.I like this move by Watson, as it broadens the company’s reach both in products and markets served.

The bottom line is that while health care reform could very well change the investing landscape within the sector, you can always find opportunities if you know where to look.

Good investing,

Marc Lichtenfeld
Investment U

The technology-laden Nasdaq Composite Index was at the forefront of the most-recent market rally, having soared more than 45% since hitting its 52-week low on March 10. That outpaced both the Dow Jones Industrial Average – up 30% in that time – and the Standard & Poor’s 500 Index – up about 37%.

According to industry analysts, the technology sector – because it is heavily reliant on borrowing, as well as consumer demand – can serve as a harbinger of economic recovery.

“Technology tends to be a leader in the early stages of an economic turn. That’s what we took for as confirmation of a sustainable rally-money rotating into a sector that historically is seen as consumer- and business-sensitive, and requiring more leverage in terms of borrowed money, because it is more sensitive to the economy,” Marc Pado, U.S. market strategist at Cantor Fitzgerald told MarketWatch.com. “I expect technology to continue to lead well through this year and into February of next year.”

Spearheading the Nasdaq’s charge has been Redmond, Wash. software giant Microsoft Corp. (Nasdaq: MSFT).  While its fiscal third-quarter profit fell 11% from a year earlier, Microsoft beat analysts’ expectations, helping the company’s stock to surge more than 50% from its mid-March low. Microsoft is up about 16% in the past month.

Semiconductor manufacturer Texas Instruments Inc. (NYSE: TXN) could trade in the is up more than 45% in the past six months to its current level of about $21 per share. The company could trade up into mid-$30s within 12 months, according to Paul J. Nolte, director of investments at Hinsdale Associates Inc., an Illinois money management firm.

Earlier this month, in fact, Texas Instruments sharply raised its second-quarter financial guidance. The reason: Customers had slowed the rate at which they were reducing chip inventories – a signal that the market for semiconductors may be stabilizing.

The company now expects to report earnings per share (EPS) of 14 cents to 22 cents, up from the previous forecast of 1 cent to 15 cents per share.

Opening New Windows

The long-suffering PC market may get a shot in the arm this fall with the Oct. 22 release of Microsoft’s Windows 7, which is all but guaranteed to generate better reviews than its predecessor, Windows Vista. Pre-release versions being publicly tested are already being called better than Vista, which was dogged by geeks and general end-users alike for its slow performance and questionable compatibility with legacy software and hardware.

Stopping short of admitting the goof and giving away Windows 7 to existing Vista users, Microsoft is offering cheaper upgrades to those who pre-order Windows 7 between June 26 and July 11.  The company will offer free Windows 7 upgrades to anyone who purchases a PC pre-installed with Vista after June 26.

Windows 7 is expected to be the operating system of choice for information technology (IT) managers who make purchasing decisions for corporate users.

“The upcoming introduction of Windows 7 could spur a rapid corporate PC upgrade cycle starting in late 2010/early 2011, catalyzed by the end of support for Windows XP and a recovery-based increase in IT spending,” said Jeffries & Co. Inc. analyst Katherine Egbert wrote in a recent research report.

But history shows that a release of a new operating system – no matter how positive the buzz – will translate into only a slight increase in PC sales, Microsoft Senior Vice President Bill Veghte said in a webcast earlier this month. On the business side, enthusiasm is high for Windows 7, but corporations will not rush to upgrade when it is released. The release “will get drowned by the macroeconomic environment,” Veghte said. “As the macro environment comes back, people will have to buy new PCs. People aren’t using PCs any less.”

Game On

Looking ahead, the tech sector is anticipating a slew of product releases in the year’s second half – many of them in the $22 billion video-game sector, which lives and dies on new releases.

Activision Blizzard Inc. (Nasdaq: ATVI), the largest third-party game publisher in the world, will lead the way with the latest in its rock music game series with the September release of “Guitar Hero 5″ on four platforms: Sony Corp.’s (NYSE ADR: SNE) PlayStation 2 and 3, Microsoft’s Xbox 360 and Nintendo Co. Ltd.’s (OTC ADR: NTDOY) Wii. The third iteration of “Guitar Hero” became the first video game ever to achieve $1 billion in sales.

But the music from Activision won’t stop with the last strum of a toy guitar: The company will debut “DJ Hero” in October for the same four platforms. “DJ Hero” will ship with a mock turntable and should appeal to fans that don’t turn to rock for their music fix.

Activision will release new titles for proven franchises such as “Modern Warfare” and “Tony Hawk.” The first “Modern Warfare” title, released in 2007, has sold 13 million copies worldwide and is one of the best-selling games on Xbox 360. The new “Tony Hawk” game represents the 12th installment in the series since it was started 10 years ago.

While sales of console games typically garner most of the attention, it is Activision’s “World of Warcraft” (WoW) playing the role of its single largest sales generator. In 2008, WoW accounted for $1.1 billion in revenue, or 38% of Activision’s total revenue. Sales from all of Activision’s console titles were $1.2 billion. WoW has more than 11.5 million subscribers, Activision said.

Since its dropping down to its 52-week low of $8.14 in January, Activision shares have risen steadily, and are now trading in the $12 range. With a war chest stuffed with nearly $3 billion in cash and ratings of mostly “Buy” or “Strong Buy” from analysts, Activision may warrant closer study by individual investors, too.

Activision’s rival, Electronic Arts Inc. (Nasdaq: ERTS) also has some potential-big-hit titles coming in the year’s second half, but saw its losses more than double to $1 billion for the fiscal year that ended March 31. Like most game publishers looking to cash in on the holiday shopping season – primetime for consumer spending – EA is saving its best for the second half of 2009.

Titles such as “Madden NFL 10,” “The Beatles Rock Band” and “Left 4 Dead 2″ will sell well, but the outlook for EA on Wall Street is mixed, with the majority of analysts rating the company as a “Hold.”

Some analysts say that EA can weather the current downturn in consumer spending, as it sits on more than $1.6 billion in cash, according to its annual regulatory filing with the Securities Exchange Commission (SEC), but the outlook for the 2009 Christmas shopping season remains uncertain.

Will iSpend?

Following a sharp drop in its stock after the revelation that its chief executive officer’s health may be worse than previously thought, shares of Apple Inc. (Nasdaq: AAPL) have slowly been climbing back toward its 52-week high of $180.91. The shares are currently trading at about 21% below that peak.

The Cupertino, Calif.-based company on June 8 removed a barrier that had stopped many consumers from purchasing its popular iPhone when it lowered the price of its 8-gigabyte 3G model to $99. With wireless plans starting at around $70 per month, Apple’s phone – and perhaps more importantly, its app store – will find its way into the hands of many more consumers in the second half of 2009.

Couple the 8GB iPhone 3G with the newly released, feature-rich 3GS model – and then stir in a barrage of television commercials – and the result should be a marked improvement in revenue.

It is unlikely that Palm Inc.’s (Nasdaq: PALM) Pre will put a dent in iPhone sales, partly because of sustained shortages as Apple floods the market with its phone. However, Sprint Nextel Corp. (NYSE: S) customers locked in their contracts looking to upgrade to a phone with a growing app catalog will see the Pre’s similarities with the iPhone.

Sprint Chief Financial Officer Bob Brust told investors via a webcast at Wachovia Corp.’s Annual Mid-Year Equity Conference that Pre shortages still exist weeks after its launch.

“We still have a backlog of subscribers but it’s not unmanageable and we get shipments every week,” Brust said. Sprint is the exclusive carrier of the Pre.

Analysts estimate that 50,000 to 100,000 Pres were sold in its debut weekend earlier this month, while Apple said the new iPhone sold 1 million units in its opening weekend.

By Bob Blandeburgo
Money Morning

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