Archives for August 2011

August 2011 - Page 8 of 10 - Money Morning - Only the News You Can Profit From

Safety Stocks: Three Ways to Profit From Market Mayhem

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There's never been a better time to invest in "safety stocks."

The Dow Jones Industrial Average is down 14% since July 22 and the Standard Poor's 500 Index is down 15% in that time. The U.S. economy is grinding to a halt, and a double-dip recession could be in the offing. Meanwhile, the U.S. Federal Reserve continues to undermine the dollar with expansive monetary policy.

Indeed, with so much bad news and chaos, there's never been a better time to stock up on the essentials – gold, guns, and cheap food. These are the things people turn to when the going gets tough – and the companies that provide these bare necessities shine the brightest when everything else seems to be falling apart.

That said, here are three safety stocks that are worth a look:

  • Newmont Mining Corp. (NYSE: NEM).
  • McDonald's Corp. (NYSE: MCD).
  • And Sturm, Ruger & Co. Inc. (NYSE: RGR).

Let's examine each in a little more detail.

Newmont Mining Corp.

Gold has been the can't-miss profit play of the past three years.

The yellow metal settled at yet another record high yesterday (Tuesday), surging 1.7% to $1,743.00 an ounce on the Comex division of the New York Mercantile Exchange (NYMEX). And Money Morning Contributing Editor and global resources specialist Peter Krauth says it could more than double from there.

"I expect gold to reach $5,000 before this bull market peaks," said Krauth. "I'm very open to the possibility that gold could correct from here, but I'd expect that to be nothing more than a short-term pullback."

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How to Bank Triple-Digit Gains During a Stock-Market Sell-Off

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Monday's stock-market sell-off was a frightening affair that sunk 94% of the stocks listed on the New York Stock Exchange (NYSE). Every single stock in the Standard & Poor's 500 Index fell, and the 635-point freefall experienced by the Dow Jones Industrial Average was its sixth-largest point drop ever.

But in the face of this bloodbath, subscribers to Shah Gilani's Capital Wave Forecast were treated to gains of 456%, 455%, 371%, and 197% on four of their holdings.

Just how did Gilani manage to engineer four triple-digit gains in the face of a near-market meltdown?

He predicted reversals in both the U.S. and Chinese financial markets, employed a "put" option strategy for insurance – and then watched as his predictions came true.

"If I'm going to buy insurance, I want the best insurance at this price," said Gilani, a retired hedge-fund manager who is also a respected expert on the global financial crisis. "Part of a good cost-structure analysis is timing, which is tough. So I polished my crystal ball and said: ‘If something bad were to happen, when would that be?' I decided August, and chose some lesser-expensive puts."

Gilani's plan paid off with these four winners:

  • A 455.56% gain from Goldman Sachs October 2011 $85 Puts (GS111022P00085000), bought June 3 for 45 cents and sold Aug. 9 for $2.50.
  • A 455.24% gain from SPY August 2011 $115 Puts (SPY110820P00115000), bought for $1.05 on June 10 and sold Aug. 8 for $5.83.
  • A 371.26% gain from FXI $40 August 2011 Puts (FXI110820P00040000), bought May 10 for 87 cents and sold Aug. 8 at $4.10.
  • And a 196.72% gain from QQQ August 2011 $50 Puts (QQQ110820P00050000), bought June 10 for 61 cents, and sold Aug. 8 for $1.81.

"The days of putting together a portfolio and sleeping on it are over," said Gilani. "You could wake up to its value cut in half. Vigilance is the order of the day."

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Why the U.S. Credit Rating Downgrade Could Cause a Full-Fledged Market Crash

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That Standard & Poor's finally downgraded its U.S. credit rating surprised no one – the agency said weeks ago that it would require a deficit-reduction agreement of around $4 trillion to affirm its AAA rating on the United States.

But what the ratings agency doesn't realize is that it's playing with fire. Because what we've seen over the past few weeks has been a massive sell-off in the stock market that suggests Wall Street's biggest players are scrambling to bolster their net capital positions.

And it's entirely possible that this already-stiff correction will snowball into a full-blown market crash.

For months, years even, many of these firms have leveraged their Treasury securities to borrow more money to buy more government bonds and other – more speculative – investments. But since Treasury bills, notes, and bonds can no longer be considered "risk free," institutions are being forced to recalculate their net capital positions to accommodate the added risk.

In industry parlance, this is called a "haircut," and it's exactly what Money Morning Contributing Editor Shah Gilani warned about back in July.

"After studying everything that could happen due to a downgrade of the United States' top-tier AAA credit rating, and the potential default on its debt, we found a scenario that would result in forced asset sales that are so widespread that global stock-and-bond markets would plunge — and economies around the world would crash," said Gilani.

Gilani now says that we could be seeing the beginning of a "global margin call" that will continue to ravish global markets.

The Dow Jones Industrial Average plunged more than 631 points, or 5.52%, yesterday (Monday), after falling 6% last week.

"The sell-off itself got uglier later in the day as margin calls likely triggered more liquidations when there was no bounce after the opening downdraft," Gilani said in an interview. "This is very worrisome. If we don't get a bounce Tuesday morning, but instead see a bad opening, margin calls will ramp up and the effect of rolling collateral and margin calls could turn this correction into a full-fledged crash."

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Investing Icons Weigh In On U.S. Credit Downgrade

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The market's verdict on the Standard & Poor's (S&P) U.S. credit downgrade is in – and it isn't good.

In direct response to the U.S. credit downgrade, the Dow Jones Industrial Average plunged more than 631 points, or 5.52%, yesterday (Monday), after falling 6% last week.

No question, we're in the midst of a free-fall. And there's no doubt about the role Washington played in creating this dangerous situation. But U.S. policymakers aren't the only ones to blame.

Some of Wall Street's heaviest hitters, including Warren Buffett and Bill Miller, have zeroed in on S&P for perhaps being a little too overzealous in its approach.

"I don't get it. It doesn't make sense. In Omaha, the U.S. is still triple-A rated," Buffett told Fox Business Network. "And if there were a quadruple-A, I'd give it to the U.S."

Buffett and fellow S&P critics said the agency made a hasty move that scared investors and clobbered markets.

Buffett: "I Don't Get It"

Buffett said the U.S. debt downgrade would not deter him from investing in U.S. Treasuries.

"If anything, it may change my opinion on S&P," Buffett said.

Echoing Buffett's disbelief was Legg Mason Inc.'s (NYSE: LM) Chief Investment Officer Bill Miller.

Miller said S&P "rushed to judgment" and took a "precipitous, wrong and dangerous" action.

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S&P's Ill-Advised Downgrade Ushers in Buying Opportunities

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A number of years ago, Standard & Poor's (S&P) gave me a desk in one of their offices on Wall Street. In those days, I was providing energy analysis for a short-lived S&P publication called Emerging Global Markets.

I never felt comfortable in that office. Actually, whenever possible, I avoided going there.

What happened this past weekend reminded me why.

S&P's horrendous decision Friday afternoon to lower the U.S. credit rating has rattled global markets, pushing Wall Street deeper into negative territory.

Jack Bogle, the legendary founder and former-CEO of the Vanguard Group, calls S&P "the gang that can't shoot straight." I think this is an apt way to label a disgrace masquerading as a ratings agency.

You see, these are the same guys whose "advice" was regularly dismissed as almost laughable during the subprime mortgage debacle. The same greedy goons who made considerable money slapping triple-A ratings on collateralized mortgage obligations, directly contributing to a worldwide credit crisis.

Seems the opportunity to make 400% or more in fees over regular ratings decisions was too much for them to pass up. Forget that they barely reviewed the packages, never rated the underlying paper, and never understood them anyway.

Ratings agencies do not make money by downgrading countries. They make money by rating paper issued by companies. And for that, they need to be visible.

Well, judging by the fact that nobody of consequence at the 55 Water Street headquarters is answering the phone this morning, S&P got the visibility it so badly wants.

The downgrade is essentially a political lecture to Congress.

It's just hard to appreciate when it's delivered by the clowns who cavalierly missed the single biggest credit mess in memory… one in which their ratings activities were centrally complicit.

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Gold Prices Hit Record High After S&P Downgrade - Are Poised to Double

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Gold prices hit a record high of $1,718 an ounce in intraday trading yesterday (Monday) in response to Standard & Poor's downgrade of the U.S. credit rating, and the continuing drumbeat of dreary global economic news will keep pushing the yellow metal higher.

In fact, Money Morning Contributing Editor Peter Krauth reiterated his belief that gold prices will more than double from current levels.

"I expect gold to reach $5,000 before this bull market peaks," Krauth said. "I'm very open to the possibility that gold could correct from here, but I'd expect that to be nothing more than a short-term pullback."

Following through on a months-long threat, S&P cut the U.S credit rating to AA+ from AAA late Friday, sending global stock markets tumbling and a flood of investors to one of the few safe havens available – gold.

"The S&P downgrade adds to concerns that investors have in the safety of U.S.- issued debt," Krauth said, pointing out that Treasuries are "considered to be the safest in the world because of their previously unblemished AAA rating and their liquidity. When doubt is cast on such an important and ubiquitous investment instrument, it's no surprise that gold, a traditional safe haven dating back millennia, is going to be a beneficiary."

Although it had already risen 15% for the year as of Friday, the appeal of gold remains high among investors worried about sovereign debt problems in the United States and Europe, as well as a U.S. recovery that looks like it may tip into a double-dip recession.

"The surge in gold is a knee-jerk reaction to the downgrade and could prompt profit-taking, but concerns of slowing economic activity in the U.S. and the lack of concise action to tame its debt levels will likely see more diversification from U.S. assets, boosting demand for the ultimate safe haven," FastMarkets analyst James Moore told the Wall Street Journal.

Gold on the Comex division of the New York Mercantile Exchange soared $66.40, a 4% pop, in overnight electronic trading Sunday night to a record $1,718.20 an ounce. After slipping below $1,700 in the morning, S&P's follow-up announcement that it had also downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac drove gold to $1,715.50 by 4 p.m.

Yet gold remains well below its inflation-adjusted peak set in 1980, when it sold for $850 an ounce – the equivalent of about $2,400 an ounce today.

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Investors: Looking at a Post Debt Ceiling Crisis World

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Global Economic Intersection article of the week

With the debt ceiling extended, the risk of a catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.

What's left is the muddling through with modest topline growth scenario we've had all year.

With a budget deficit humming along at 9% of GDP, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.

Read More…

Buy, Sell or Hold: Now's Not the Time to Connect to LinkedIn Corp. (NYSE: LNKD)

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Linkedin Corp. (NYSE: LNKD) made a lot of headlines this summer with one of the most successful initial public offerings (IPOs) since the dotcom bubble.

However, that IPO has left the company slightly overvalued. At current levels LinkedIn has a market cap of almost $10 billion and is trading at more than 30-times 2010 sales. And while the company has guided third-quarter and full-year revenue higher, it also has warned that it won't be profitable in 2011.

That's not to say LinkedIn doesn't have some real advantages – it does. The company has performed very well in some areas and operates in an attractive niche. But it's also facing some serious headwinds that include market saturation, pressure from short-sellers, and low revenue expectations.

For those reasons, LinkedIn is a "Hold" – at least until its share price more closely aligns with its fundamentals.

A Closer Look at LinkedIn

Let's look at the positives first.

LinkedIn has $106 million in cash and no debt. The company's second-quarter revenue more than doubled from last year to $121 million. Revenue from marketing solutions surged 111% to $38.6 million, and sales of premium subscriptions increased by 60% to $23.9 million.

These results are no fluke. As a social network focused on professionals, LinkedIn is a valuable resource for unemployed workers – and there are a lot of people looking for jobs right now.

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Time to Profit, Not Panic, from the Stock-Market Sell-Off

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Thursday's stock-market sell-off has injected investors with more fear and uncertainty – but this is not the time to panic.

The Dow Jones Industrial Average on Thursday fell 513 points, or 4.3%, and regained only 0.54% Friday to close at 11,444.61. The Standard & Poor's 500 Index fell 60.27 points, or 4.8%, Thursday and slipped another 0.06% Friday to close at 1,199.38.

But that may be just what the market needed.

"This market was badly in need of a sell-off, so what's happening now is long overdue," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

Not only was the stock-market sell-off bound to happen, it's going to create new profit opportunities that could offset the losses many investors absorbed during the correction.

"We may take some small losses, but we're not going to get killed," said Money Morning Contributing Editor Shah Gilani. "There are going to be life-changing opportunities for us in the very near future and the next 18 months. I'm talking seriously huge, massive opportunities."

Our financial experts have put together the following tips on surviving the market roller coaster ahead:

  • Focus on large-cap dividend stocks – and mind your protective stops.
  • Don't forget gold, silver, and oil.
  • And get ready to buy – the best companies, which still have strong earnings, will be going on sale.

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Is This the Worst Congress Ever?

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A growing body of evidence suggests that our current crop of representatives in Washington have, in fact, formed the worst congress… ever.

A new CBS News/New York Times poll last week revealed that 82% of Americans disapprove of the way Congress is doing its job – the highest disapproval rating since polling began in 1977. Just 14% approve of Congress' performance.

The poll comes on the heels of a debt-ceiling debate that was fraught with tension and absent of any real solutions.

Prior to the debt deal being passed last week, a USA Today/Gallup Poll in July showed that just 7% of Americans believed their representatives in Washington were negotiating in good faith. And two-thirds of respondents said elected leaders in Congress were putting their own political interests ahead of the country's interests – leaving U.S. taxpayers to suffer.

Sadly, Americans have gotten even more frustrated since a compromise on the debt deal was reached.

The CBS/NYT survey was taken on August 2nd and 3rd – immediately after the deal was brokered. It found that 68% of Americans disapprove of the way the Democrats handled the debt-ceiling debate, while just 28% approved.

Republicans fared even worse. Some 72% of Americans disapproved of their approach to the debt debate, while just 21% approved. Additionally, the majority of Americans (52%) say Republicans were too uncompromising. Comparatively, 34% say Democrats compromised too little.

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