Category

Martin Hutchinson

The Fed

Your Best Strategy for Playing This QE Rally

Don't worry. The bubble "Quantitative Easing" has built is still intact. For now.

However, even though there's breathing room, don't think it's time to breathe easy. There will be Hell to pay, just not now.

And I have found three opportunities to take advantage of the next phase in this unsettling market.

But let's gather some perspective first.

The news that the Fed might taper QE bond purchases gave the bond (and stock) markets a fit of the vapors and caused gold to careen toward $1,200 an ounce.

Gold Bugs Love It, But a New Gold Standard is Just a Dream –For Now

Thanks largely to Ron Paul, the Republicans have suddenly become enamored of gold.

And why not?…It is real money.

These newly-born gold bugs have even gone so far as to include a call for a commission to examine a return to the gold standard in the party platform.

Needless to say, we've come a long way since President Richard Nixon "closed the gold window" in 1971. Forty-one years, and a few financial disasters later, the debate has begun anew.

But it begs the question: How would the gold standard work?

What's more, what would the economic implications be, and is it likely to happen or is it all just a gold bug's dream?

In ancient and medieval times the answers were quite a bit more simple. Since there was no real banking system, there was also no argument.

Kings coined money with gold, silver, or copper, and the people accepted the money at a price based on its metal content. The idea of taking paper instead would have been thought of as sheer madness.

Only in China, an isolated and stable society, was paper money used during the Song Dynasty of the 10th through 13th centuries, but even there the Mongol invasion and fall of the Song regime caused the paper money system to collapse.

Paper money backed by gold only became possible once modern banking got going in Europe in the 16th and 17th centuries.

In fact, the British Gold Standard was devised in 1717 by no less than Isaac Newton, then Master of the Mint. Other countries soon joined Britain in linking their currencies to gold, including the United States from 1878 until its abandonment in 1933.

Of course, countries claimed to be on a gold standard under the Bretton Woods Agreement from 1944-71, but gold was only exchangeable between governments. Indeed, holding gold was prohibited in the U.S. for private individuals.

But inevitably, the Bretton Woods monetary system itself became manipulated and collapsed in inflation.

That brings us to today….

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Election 2012: A Candidate With Economic Heft, Paul Ryan is No Sarah Palin

Win or lose, the most recent vice-presidential choices never mattered much when it came to the economy.

From Joe Biden to Sarah Palin to John Edwards, none of them were ever known for their grasp of economic policy.

But Paul Ryan is different.

His selection as vice presidential nominee last weekend has significant implications for the economy if the Republican ticket wins Election 2012.

In fact, the selection tells us more about Mitt Romney than we knew before, since Ryan is committed to a group of policies difficult to implement but which would change the direction of U.S. fiscal policy.

If you're interested in an adult conversation about the dangers of the fiscal cliff, the selection of Paul Ryan ensures you are going to get one this fall.

As an investor, that means you need to position yourself to benefit from a GOP win, without damaging your wealth if the just about equal possibility occurs of losing to President Barack Obama and Vice-President Biden.

With Ryan now in the race, here's what you need to know about this up-and-comer from Wisconsin.

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Don't Fall for This Magical Panacea, Share Buybacks are Dangerous to Your Dividends

Many investment advisers like to recommend stocks with large buyback programs. A buyback, they argue, is like some sort of magical panacea.

It allows companies to invest in themselves which pushes the share price higher.

On the face of it, the premise seems logical enough. But the reality is that it's not quite that simple.

In fact, you can call me old-fashioned if you like but I believe large buyback programs can actually be dangerous and stocks with them should be avoided. I'll tell you why.

It primarily has to do with the rise of corporate options schemes as form of compensation.

Of course, it wasn't always this way.

Before "options as compensation" became so widespread, management usually owned shares directly just like any other shareholder. It meant they were just as interested in receiving their dividends as the guy on the street.

That has all changed. Now that management has ownership largely in the form of stock options, they're not as keen on dividends. As option holders they don't receive them.

They also recognize dividend payouts cause the share price to fall after they are paid, lessening the value of their all-important options.

It's all about the money you see which is why options-rewarded management came up with share buybacks in the first place.

For options-rewarded management, buybacks have two advantages.

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Dividend Stocks: Don't Fall For These High Yield Traps

Buying stocks with high dividend yields is an excellent way to invest. But it's not fool-proof.

In fact, if you shop by yield and yield alone, you're playing dangerous game. It's called picking up nickels in front of a steamroller.

Admittedly, it may work for a while, but eventually I can assure you the steamroller will prevail.

That's why in today's low-growth environment, it's critical to know which dividend stocks NOT to buy.

Avoid the real duds and the dividends alone will be enough to bail you out of minor mistakes. Find yourself on the wrong side of the fence, and your high-yield investment could end up being pretty costly.

Success comes from understanding the difference between the two. Here are three ways to separate the winners from the losers.

Avoid Stocks that are "On the Clock"

First, at all costs, investors need to avoid dividend stocks where the source of income will dry up in a few years, and the dividend payout doesn't add up to the amount you're paying for the stock.

You wouldn't think there would be any of those, but there are! Investors fall for them because of their high yields.

Here are a few examples where one day the well will suddenly go dry leaving investors with empty cups.

Great Northern Iron Ore Properties (NYSE:GNI): GNI yields a monster 17% and has a P/E of 4 times. In business since 1906, it looks very attractive-on the outside. However, on the inside its main asset is a lease on iron ore deposit-bearing land in the Mesabi range which runs out in 2015. With three years left on the lease, investors can only earn 51% (3×17) of their money back. I just want to know where's the other 49% is? There are some residual assets, but not enough.

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Try as He Might, Mario Draghi Cannot Save the Euro

Of all the pyramid schemes that governments and banks have perpetrated in the last decade, the Eurozone debt crisis is the most damaging.

No amount of posturing by European Central Bank President Mario Draghi can change that fact.

The market may like what Draghi has to say about the fate of the euro, but tomorrow's big ECB meeting will change little.  

The massive amount of money Draghi will need to print is far too great for the German taxpayer or the ECB's balance sheet.

Eventually, the Eurozone will break up and drag the global economy right down with it.

In the long run, that will mark the beginning of the recovery, but in the short run it will precipitate a banking and economic crisis that will make 2008 look like child's play.

As investors, we had better be prepared.

Politicians Doomed the Euro

The Euro was a reasonably sensible idea, although without political integration it was always likely to cause trouble.

What's more, the technical side of it was for the first ten years handled very well by Otmar Issing at the European Central Bank.  Issing spent his career in the Deutsche Bundesbank and knew what a decent currency looked like.

However, two decisions taken by politicians doomed the currency.

One was to admit Greece into the union, which to any competent observer was a hopelessly corrupt and uncompetitive economy propped up by giant EU subsidies.

More important, though, was the design of the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) payments system which was replaced in November 2007 by TARGET 2.

As I wrote in an earlier article, it is the secret system that blew another hole in the euro.

Target 2 requires all payments between banks in different countries to go through the national central banks (thus giving those otherwise redundant entities something to do).

Theoretically that's the same system as in the U.S., where many payments are made through the regional Federal Reserve Banks.

However, in the U.S. the larger banks deal direct, and outstanding payments in the regional Fed banks are cleared regularly. What that means is that if Alabama runs a payments deficit with New York, no large balances are allowed to build up.

Conversely, there has been no automatic clearing between the central banks in Europe. This may sound arcane and boring, but I promise you it is not.

These payment imbalances have two nasty side effects.

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Six Dividend Stocks to Hold Forever

Investor. Now there's a word you don't hear much these days. "Buy and hold," they tell us, has gone the way of the dinosaur.

Today, it's all about the fast money. In the market, out of the market… this stock, that stock…

Of course, that's perfectly fine for traders. The good ones earn small fortunes that way. But for folks who don't have that kind of experience, being nimble is simply an invitation to be whipsawed by the markets.

You may be one of them.

For instance, are you fed up with stock recommendations that only seem to last a couple of weeks?

Or do you constantly find yourself buying on a day when the market is hot, because you feel enthusiastic, only to end up selling on a bad day, because the same stock suddenly looked less attractive?

If so, there's a solution to all this day-to-day madness. Despite the rumors of its demise, there are still stocks you can buy and hold forever.

Of course, seasoned income investors have known this for years. That's why the truly rich don't spend their days watching the financial news and trading stocks. They're too smart for that.

They know that investing in steady-income producing dividend stocks is just as rewarding over the long haul.

How to Pick the Long-Term Winners

However, picking successful dividend-paying stocks is not as simple as buying only the stocks with the highest yield. In fact, the stocks with the highest yields are often the ones that trip up investors the most.

When it comes to buying stocks you can truly hold forever, what's important is the company's track record.

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Recession 2013: Prepare Your Portfolio with These Rock-Solid Dividend Payers

Successful investing is a bit like connecting the dots. Put enough of them together and they begin to form a picture.

Unfortunately, today's dots are pointing towards a recession.

With first-quarter GDP growth under 2% and a whole host of indicators moving in the wrong direction, it looks as though the U.S. economy has stalled.

That leaves income investors like us faced with a very important question: how do we best protect our portfolios from the stock price declines and dividend cuts that a recession would bring?

One simple answer is to invest in those countries that are not suffering recession. That opens up a world of possibilities.

For instance, you might consider investing in Japan, which grew at over 4% in the first quarter. Orix Corporation (NYSE: IX) is a name I like.

Or better yet you could invest in emerging markets where growth continues to sizzle.

That makes stocks like the Aberdeen Chile Fund (NYSE: CH) a good buy-especially considering the fund offers a dividend yield over 10%. The fund is attractive to me for two reasons.

First, it's because Chile is a well-run country, standing higher than the U.S. on several international business surveys. But more importantly, its dependence on copper and other commodities is not a problem unless the global economy as a whole goes into recession, which I don't expect.

With assets in primarily Chilean securities, the fund also offers investors a nice measure of diversification from the U.S. economy, since they can expect Chile to keep on growing– even if the U.S. economy takes a step backwards.

But that doesn't mean you need to avoid the U.S. altogether, either.

In fact, there is a key indicator I'll discuss in a moment which will allow you to preserve your income and the value of your investments through all but the deepest recessions.

First though, you'll need to avoid a few pitfalls. As always, it's never just a matter of picking the stocks with the highest dividend yield. It's just not that simple.

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A Liberty Investor's Guide to Latin America

Words, indeed, are powerful things. As an Englishman in America, my personal favorite is freedom.

It's embodied by those words penned so long ago by a young Thomas Jefferson…

It's the idea that "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

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Is Facebook (Nasdaq: FB) a Replay of the AOL/Time Warner Deal?

I hope you didn't buy shares of Facebook (Nasdaq: FB). The valuation was always too aggressive.

And increasing both the price and amount of Facebook stock at the last moment ensured that both underwriters and retail investors ended up with far more shares than they bargained for.

In fact, the Facebook fiasco reminds me of another deal that marked the peak of the dot-com boom.

No, not the ineffable and rather sweet Pets.com- their IPO was far too small a deal to have genuine market significance.

Instead I'm talking about the AOL and Time Warner merger announced on January 10, 2000.

Like Facebook, the deal was sold as a big success. It was only later that it quickly became clear that AOL had sold itself at the absolute peak of the market.

From there on out it was all downhill as the storied merger practically top-ticked the market.

Before Facebook There Was AOL

AOL had built up a nice business from "dial-up" Internet access, but it was already obvious by January 2000 that the arrival of broadband Internet would make for a difficult transition.

As such, AOL's market capitalization of around $200 billion was purely the result of the frothy market of 1999.

Nevertheless, that rich valuation enabled AOL to become the senior partner in an acquisition of the Time Warner media conglomerate, getting 55% of the merged company in a deal valued at $350 billion. It was the largest merger in U.S. history.

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