The U.S. Aging Crisis: A Threat to Stock Market Prices?

The U.S. Aging Crisis: A Threat to Stock Market Prices?
by Alexander Green, Investment U Chief Investment Strategist
Friday, March 9, 2012: Issue #1726

Robert Arnott claims that the U.S. aging crisis is a threat to future stock market prices. But do the numbers add up?

There’s a new scaremonger in town. And his name is Robert D. Arnott, a portfolio manager, asset-manager executive and Chairman of Research Affiliates in Newport Beach, California.

Mr. Arnott has a simple thesis. Over the next 10 years, the ratio of retirees to active workers will balloon. Retirees, of course, must eventually sell their stocks to support themselves. But there will be fewer young investors around to buy them. Ergo, returns on stocks over the next 10 to 20 years will be anemic.

If this sounds simplistic, congratulations. You probably have a brain and at least a modicum of common sense. This type of “stock market analysis” is really no analysis at all. More to the point, it doesn’t work. Just ask failed economic futurist Harry Dent, whom I’ve written about before.

While it’s inevitable that there will be 10 new senior citizens for each new working-age citizen over the next decade, that in itself doesn’t portend paltry equity returns.

For starters, let’s look at what’s happening to the world population as a whole. There are currently seven billion human beings living on the planet. At the current growth rate, that total is likely to hit eight billion within a decade.

Now, if you believe that investors in China, India, Brazil and other countries will have no interest in buying companies like Procter & Gamble (NYSE: PG), ExxonMobil (NYSE: XOM), or Coca-Cola (NYSE: KO) in the future, no matter how inexpensively they’re priced, I guess you might put some credence in Mr. Arnott’s thesis.

But that’s highly unlikely. Citizens of capitalist countries are getting wealthier and better educated all the time. And the world is becoming more integrated. Would you really have a problem buying shares of Toyota (NYSE: TM), British Petroleum (NYSE: BP) or Nestle (OTC: NSRGY.PK) if they were bargains?

Of course not, regardless of the demographic trends in Japan, Britain, or Switzerland.

Mr. Arnott doesn’t just miss the big picture about the future, however. He also misinterprets the past. In a recent Wall Street Journal interview, for example, he talks about the collapse of Japan’s stock market over the last 23 years and blames it on the country’s aging population.

I have a better explanation. When the Nikkei 225, Japan’s leading stock market benchmark, climbed to nearly 40,000 in 1989, it was a bubble of epic proportions. Many stocks traded at more than 100 times earnings. And real estate was even more absurd. Just the 1.32 square miles that encompassed the Imperial Palace in Tokyo were valued at more than all the real estate in California combined.

Now that’s nuts. Crazier still were the Japanese banks that loaned money against these wildly inflated property values. This led to a protracted banking crisis that Japan’s political class refused to clean up.

To imagine that the two deflationary decades that followed this mania were the result of an aging population is like blaming this year’s warm winter on your aching big toe. Yet Arnott insists we should hunker down since “[Japan’s] demography is 10 years ahead of ours.”

Want to know what will really determine stock prices in the future? Earnings. I challenge you to look back through history and find even one publicly traded company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.

Perhaps our aging retirees will buy less in the future and contribute less to U.S. corporate profits. But there are billions of consumers around the world hungering for homes, computers, cars, phones, health insurance, credit cards, pharmaceuticals and golf clubs. They’re likely to be an engine of world economic growth – and rising U.S. corporate profits – for decades to come.

Don’t let anyone scare you otherwise.

Good Investing,

Alexander Green

Profile of an Illegal Insider Trader: Garrett Bauer

by Insider Alert Research Team

Whether done the right way (a.k.a. the legal way) or the wrong way (i.e. the illegal way), insider trading can be quite lucrative.

When done the wrong way, it can also be quite detrimental, ending in embarrassing investigations, steep fines and significant jail time. Hardly the way a well-educated, hard-working corporate man or woman wants to go.

Take it from Garrett Bauer, a former independent day trader on Wall Street, who worked for RBC, JAG Trading and Lighthouse Financial in the past. He also made at least $32 million of personal profit off of insider trading. The illegal kind.

That money paid for a piece of real estate in Boca Raton worth $875,000 and another $6.65 million, 6,700 square foot penthouse in Manhattan’s Upper East Side. Business Insider reported last year:

“The penthouse is beyond luxurious. There are ten rooms, including a living room with 35-foot floor-to-ceiling windows, a kitchen with state of the art appliances, and a gigantic master suite. And don’t forget about the 1,320 square foot private roof deck.”

Judging by those posh results, his insider knowledge served him well. As evidenced by his pending March sentencing, however, it didn’t serve him well enough.

While the trades were extremely lucrative, they were also performed based on specialized knowledge. That in and of itself isn’t illegal, but it becomes so when investors don’t fill out the proper forms in the proper process. And Bauer deliberately did not follow the legislated procedure, knowing full well that his actions were illegal.

In his own words, on March 21, 2011, Bauer was recorded saying: “I mean, the fact is we did something wrong. So it is not like we are being convicted of doing nothing. We did something wrong here.”

And he admitted as much in a court of law nine months later, when he entered a guilty plea to the charges of insider trading, money laundering and obstruction of justice.

At the time, the prosecution recommended a prison sentence of nine to 11 years, in addition to the money and property federal authorities permanently seized. And historically speaking, Bauer doesn’t have very good chances of the judge knocking that down to something less severe.

Invited to speak at Yale by the school’s College Investment Group as a deterrent to future white collar crime, he duly warned the gathered students that judges have a tendency to rule harshly on such cases. Their purpose: to discourage further bad behavior on the part of other well-connected businessmen and women.

Though insider trading cases perhaps get the most coverage, according to the FBI database, “White-collar crimes are categorized by deceit, concealment, or violation of trust and are not dependent on the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure a personal or business advantage.”

The database also states that “The number of agents investigating corporate and other securities, commodities, and investment fraud cases has increased 47 percent, from 177 in 2001 to more than 250 today. Since 2007, there have been more than 1,700 pending corporate, securities, commodities, and investment fraud cases, an increase of 37 percent since 2001.”

So apparently judicial attempts at stemming the tide by implementing harsh sentences doesn’t work nearly as well as they’d like it to. Not that it’s their fault.

While Garrett Bauer now fully recognizes that “there are catastrophic consequences” to insider trading, he also points out how “practically everybody thinks it’s not going to happen to them.”

Doubtlessly, many people do get away with their white collar schemes. And Bauer could have been one of them, considering how he started illegal insider trading back in 1994 and continued his criminal career until 2011.

That’s a sizable stretch of time to fly under the radar. Though admittedly, it probably would have gone a lot easier for him if he hadn’t been quite so good at hiding his activities…

It All Started with Matthew Kluger

When authorities arrested Garrett Bauer, they also took 50-year-old Matthew Kluger into custody, charging him with insider trading as well.

At the time, Kluger was a senior associate for Wilson Sonsini Goodrich & Rosati, where he worked on mergers and acquisitions (M&A). But before that, he had a varied career, filled with different educational pursuits and occupational focuses. In an April 6, 2011 piece, the Business Insider detailed:

“Kluger didn’t become an M&A lawyer until later in his career. The first school Kluger went to was the Kent, Connecticut-based Kent School, a private boarding school. He then went to Cornell, where he studied at the school of Hotel Administration… Later, Kluger worked as the General Manager of a Toyota dealership in California. He graduated NYU law school in 2005.”

From there, he eventually made his way to Wilson, et al, where he represented businesses in tricky cross-border transactions. Since those deals would have involved different languages and cultural traditions, they would have been complicated enough without adding in illegal aspects to the mix.

Nor was he playing around with small-time companies. His clients included well-known businesses such as CBS, Ducati, IBM, Johnson & Johnson, RiteAid and Unilever.

Not that the big names seemed to bother him at all. If anything, they probably enticed him all the more with their enormous potential for significant profits.

On April 7,2011, as the public was still finding out about the decade-plus-long dealings, Bloomberg divulged that “The scheme laid out by prosecutors began with Kluger’s passing tips about deals he worked on as an associate for major deal law firms.”

According to informed speculation over at Business Insider the day before, he already had a history of unethically passing along information from back when he was still in law school. But it seems that he had the correct connections well before then as well, considering how he initiated the fateful scheme in 1994. That was when he asked middleman Kenneth Robinson to locate people who could and would knowingly act on insider information he relayed to them.

Robinson, a mortgage broker, went on to contact Bauer, his longtime friend. And as history now blatantly shows – and Bauer now blatantly admits – Bauer jumped right on that bandwagon. In many ways, Bauer even took charge of the operations to everybody’s benefit.

Everything seemed to go smoothly for a while. From 1994 to 1997, Kluger passed along tips he garnered from Cravath Swaine & Moore LLP, the firm he was working for at the time. It all happened again from 1998 to 2001, after Kluger switched jobs and began working for Skadden Arps Slate Meagher & Flom LLP.

During those times, Kluger acted like the pro he was, making sure to never divulge information pertaining to cases he was personally working on. He didn’t even open any suspicious-seeming documents on his computer. Yet, even so, he was able to access enough information to make lots of money.

Insider Trap Laid, Set and Sprung

 Kluger might have been quite good at what he was doing, but Bauer was apparently even better.

For some unknown reason, the two men and their partner, Robinson, took a hiatus from their illicit activities for a while. Maybe it was because Kluger was so good at keeping his white collar crimes under the radar. Maybe one or more of the men had personal reasons that kept them away from it all.

Regardless, according to now-public records, the three put the brakes on the operation in 2001 and didn’t start back up again until 2005.

They should have just stopped while they were ahead, however, since that third and final round of illegal insider trading was what did them in.

At that point, Kluger was working at Wilson Sonsini Goodrich & Rosati PC in Washington. And Bauer had long since taken over the roles of paymaster and benefactor. Or so said the prosecutors in the case. They don’t appear wrong, however, considering that, of the $32 million the men made together between 2005 and 2011, Bauer held onto all but $2 million of it.

Admittedly, that’s small change compared to the money he was working with overall. Before his arrest, Bauer said he typically traded a minimum of $50 million per day. Considering that his daily maximum was usually in the $100 million range, it shouldn’t be surprising that his 2010 total was in the billions: $8 billion, to be precise.

Of that, he told Yale students, “well under” one percent was on illegally obtained information.

Following his speech, Yale Daily News summarized his story, writing that “The scheme was discovered after Bauer became more selective about which tips he used. Robinson – who had previously not generated large profits in his own personal trading account – then began acting on Kluger’s tips… and the Securities and Exchange Commission (SEC) became suspicious of the spike in profits and investigated Robinson, who subsequently turned in himself, Bauer and Kluger.”

Technically, it could be argued that Kluger and Bauer could have kept up their schemes indefinitely without ever tipping off the SEC. Either of them could have possibly messed up significantly enough to warrant government attention even if Robinson hadn’t been caught red-handed. But their previous history and even their behavior during the official investigations seriously suggest otherwise.

With the FBI breathing down his neck, Robinson not only divulged his own discretions and those of his partners, he also went so far as to wear a wire while making numerous phone calls with the two other men.

Bloomberg notes:

“Bauer, 43, told his friend [Robinson] he believed they’d sufficiently hidden their crimes by talking on disposable cell or pay phones and by using cash from small bank accounts to dole out profits of the alleged scheme.”

They even discussed literally burning money or putting it through a washing machine cycle to clear it from any incriminating fingerprints.

That’s why Kluger was confident in their ability to escape unscathed in the end. In one recorded conversation, he told Robinson, “As long as Mr. G [Bauer] keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything.”

Again, that might very well have been true. But Robinson already had talked and was still talking, which makes the question altogether moot.

Bauer told Yale students that his entire body “turned numb” when he finally recognized that his friend had ratted him out. While he has since come to terms with that betrayal, he still acknowledges the obvious: that the next several years will be difficult, also noting that the waiting period between his guilty plea and sentencing is the proverbial eye of the storm.

He’s using that window of opportunity to give talks addressing the consequences of what he did, volunteering at a soup kitchen, teaching English and math to the underprivileged and making balloon animals for children with disabilities.

Whether all of those good works will serve him well in March when the judge determines his punishment, however, is still left to be seen.

Everything You Need to Know about Insider Trading

by Insider Alert Research Team

Insider trading.

You might have heard the term back in 2011 when Peter Schweizer’s book, “Throw Them All Out,” first caught the attention of 60 Minutes and quickly ignited a firestorm of controversy.

In “Throw Them All Out,” Schweizer detailed numerous examples of congressional corruption, including our lawmakers’ habit of legislating themselves exclusive loopholes to profit off of the rules and regulations they shackle the rest of us with. That includes insider trading.

Let me explain…

Insider trading, at its very basic, is when somebody with special knowledge about a company decides to either buy or sell shares or security of said company. Usually this is somebody high up on the corporate ladder but, as Briefing Investor explains it, it can also include “officers and directors of companies, owners of restricted stock, and owners of more than 10% of a company’s stock.”

What’s wrong with that, you might ask?

Well, that’s where things start to get a bit more complicated.

You see, when the stock market crashed in 1929, setting off the Great Depression, a lot of blame started flying around pretty quickly as blame usually does. And while the government was in part responsible for the mess and definitely for the ensuing chaos, it didn’t want to acknowledge that blatant fact.

So, for better or worse, it began meddling in the private sector more than it already had been.

In 1934, Congress passed the Securities Exchange Act, which was promptly signed by President Franklin Delanor Roosevelt. Arguably the first of its kind – at least on the federal level – it placed strict controls on publicly traded companies with the stated intention of evening the playing field against the “fat cats” on Wall Street and in favor of main street.

Among the long list of regulations the Securities Exchange Act outlawed were:

• Using any “device, scheme, or artifice to defraud,” investors, essentially requiring companies to list all relevant information about their businesses, profits, etc. or, as Cornell University Law School explains it, anything “that investors would think was important to their decision to buy or sell the stock”
• Manipulating the market to suggest that stocks are worth more than they actually are
• Employee purchases or sales of ownership in a company without first making the public aware of the transaction, also known as insider trading

Altogether, the Act was supposed to force companies to behave more ethically and investors to act more intelligently, with the combined result of keeping the markets from crashing again. The same was true for the Sarbanes-Oxley Act of 2002, which demanded even more transparency from businesses, adding additional paperwork for them to fill out and information they had to release.

Obviously, neither have prevented very much, as evidenced by the multiple stock market crashes and recessions 1934, corporate scandals such as Enron, WorldCom and Satyam, as well as the government-connected Fannie Mae and Freddie Mac, corporate crooks such as Bernie Madoff and Jon Corzine, and Raj Rajaratnam and the other 55 people who have been charged with insider trading since 2009.

And those are just the ones who get caught!

That also isn’t to mention that company’s are really quite clever about following the letter of the law rather than the spirit much of the time. (Though it’s hard to blame them sometimes when they have to follow so many of said laws.)

As Cornell University explains:

Section 9 of the 1934 Securities Exchange Act “addresses manipulation of the stock market by traders… However, modern market manipulation is accomplished through methods that are more subtle and harder to detect… [partially because] investors must prove that the price was actually affected by the manipulation, and that the defendant acted willfully. Proving damages also involves proving the actual value, since successful claimants may recover the difference between the actual value and the price they paid.”

And the same can be said of many other aspects of insider trading law, as discussed further on.

Their Insider Pain Can Be Your Outsider Gain

Regardless of whether either the Securities Exchange Act of 1934 or the Sarbanes Oxley Act of 2002 were right or wrong, helpful or harmful, effective or ineffective, or even selfishly or selflessly motivated, they are the reality that the publicly-traded business world has to operate under in the United States.

As the aforementioned “Throw Them All Out” by Peter Schweizer pointed out, Congress doesn’t have to abide by any such rules since they loopholed themselves right out of any such responsibility or accountability, but that’s another topic for another article.

In the meantime, average investors can get ahead of the game if they only have the know-how and commitment to utilize their resources properly. (For anybody who doesn’t have the time or inclination to not only look into the following resources but follow them up and research the company as well, consider Alex Green’s Insider Alert, which does all of that work for you. For more information about the Oxford Club service, click here.)

Unless you want to get into the world of shorting stocks, forget paying that much attention to when insiders are selling. Partially that’s because there are at least a dozen good reasons for company employers or head honchos to sell what they have. And most of them are personal, having nothing to do with the company’s short-term, mid-term or long-term growth.

The chief financial officer might have a daughter going off to college, the CEO might be buying a new house, or the vice president’s young son might require a costly medical treatment. And an easy way for any of them to get the finances necessary for any of those purchases is by selling off some of their shares.

Now, if the CFO, CEO and VP are all selling at the same time, that’s reason to think twice about investing in the company. But if it’s just one or even two corporate insiders offloading some shares, more than likely, it isn’t in any danger of becoming the next Lehman Brothers.

On the other hand, there is only one reason that insiders buy, and that is that they expect their company to do well in the near future. And, let’s face it: Out of all of the analysts, investors and industry experts who like to spout their opinions at every opportunity, it’s the insiders who should know the best how their company is really doing and what it is really capable of accomplishing.

Back in 2009, Alexander Green, who edits the Insider Alert, wrote how, in 2008, he discovered that:

“David Abrams, a Director of Crown Castle International made the single-largest insider purchase in the nation. He bought 4.5 million shares at a cost of more than $60 million.

“Based in Houston, Crown Castle leases cell towers and antenna space to wireless communications companies. Most of these are in the United States, although more than 1,400 are in Australia.

• The company has more than 24,000 towers in prime markets and is actively building more to lease.
• Recent earnings, released earlier in the month, contained a few surprises.
• While earnings were in the red, revenue was still growing at 9%. And I noticed that site rental revenue, gross margins and recurring cash flow all exceeded expectations.
• Moreover, the company had lost three-quarters of its market value and was selling below book value.”

Triggered by the SEC filings that Abrams legally had to file within two days of his purchase, Alex was able to identify it as a potential growth stock worth targeting. But he didn’t stop there, taking the additional necessary step of researching the company from what it did to how and how well it did it.

Then he recommended Crown Castle International to his Insider Alert subscribers and he watched it.

Of course, the markets weren’t behaving well in 2008. At all. Yet two months later, the stock had shot up 58%. And Alex was able to lead subscribers to that significant short-term gain all because he was paying attention to what the insiders were doing.

Insider Activity Isn’t So Easy to Find

As previously mentioned, while insider trading can prove extremely lucrative, it isn’t always the easiest task to interpret or even find.

For starters, the SEC – in typical governmental fashion – doesn’t just have one generic form for insiders to fill out whenever they’re making a transaction. They have multiple ones, including:

• Form 3 filings, which officially record how much an insider owns
• Form 4 filings, which officially record any changes to what an insider owns
• Form 5 filings, which basically sum up everything recorded in Form 4 filings for the year
• Form 13D filings, which have to be filled out as soon as a shareholder owns 5% or more of a company’s shares or securities
• Form 144 filings, which officially record the POSSIBLE sale of what an insider owns (No sale actually has to be made, so someone like a CEO can just keep filing Form 144s every 90 days just in case he does want to someday sell something.)

Starting to get the picture?

And it gets even more complicated than that…

As Briefing Investor says: “Unfortunately, even if you could access all insider filings electronically as an Internet investor [which you can’t, considering that much of the data doesn’t ever have to make it onto the internet or any traditional news source either], the time requirements on these forms does not always prove helpful. Form 144s must be filed in advance of the actual sale, but it may be done as early as the morning of the sale.”

In other words: not helpful at all. The same goes for Form 4 filings, which are submitted to the SEC after any changes are made, not before or even during.

Any savvy businessperson or anybody with access to a decent legal advisor can easily get around the rules and regulations – though not the paperwork – to profit just about as nicely as he or she would if the government didn’t meddle as much as it does.

Clearly, researching insider trading with the intent of capitalizing on it can easily become a complicated and unhelpful mess for anybody who doesn’t know exactly what they’re doing or at least knows somebody who does.

But for those who can successfully navigate the complicated, convoluted world of insider trading, there’s major money to be had.

Why the Gold Slump is Not Over

Why the Gold Slump is Not Over

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 09, 2012: Issue #1682

Not long ago, my colleague Mark Skousen asked a roomful of attendees at an investment conference how many of them owned gold. Virtually every hand in the room went up.

“And how many of you have ever sold any of your gold?”

Virtually every hand in the room came down.

For many investors, gold is their “forever investment,” the one asset they never plan to sell. That could be a mistake, a big one.

I can assure you that the institutional investors who have bid gold up the last few years consider the metal a “hot date,” not a long-term marriage. And that bodes ill for prices in the short to medium term.

Yes, I was bearish on gold a year ago. But I’m more bearish on it today. After all, the trend is your friend.

True, gold went up in the first half of 2011 and didn’t peak until August. But take a look at a five-month chart.

It’s not a pretty picture.

Of course, gold is hard to value under the best of circumstances. It has very few industrial uses. It generates no earnings, pays no dividends, accrues no interest and provides no rental income. That means the best any of us can do is guess where it’s headed next.

So why am I guessing it will be lower? Let me count the ways:

1. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?

2. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.

3. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.

4. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.

5. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Soros and several other major speculators are openly forecasting outright deflation. That would not be good for gold.

6. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.

7. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.

I’m not suggesting that anyone bail out of gold. You should hold at least 5% of your liquid assets in gold and gold stocks, and perhaps more. But if you’re one of those folks I meet who has 30%, 50% … even 80% in the barbarous relic, you’re really sitting at the roulette table at 3 AM.

No one can say unequivocally that the bet won’t pay off. But there could be a steep price to pay if it doesn’t. The last time gold was a bubble, investors were down more than 60% two decades later.

As Mark Twain said, “History may not repeat itself. But it rhymes.”

Good Investing,

Alexander Green

How the Euro Crisis is Good for Your Portfolio

How the Euro Crisis is Good for Your Portfolio

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 12, 2011: Issue #1662

I’ve been a table-pounding bear on the euro for almost two years now. With each passing day, that currency looks more and more like a failed government experiment.

Painful, structural changes are needed – and the profligate Greeks need to be booted out. And, even then, the euro is likely to continue its decline against other major currencies.

But the euro, perhaps in altered form, will survive. So don’t believe the doomsters who say we’re headed for another world financial calamity like we faced in 2008.

Too many investors are nervously sitting on the sidelines, missing great opportunities in today’s market. If you understand how the euro crisis is a good thing, you can start making serious money again. Here’s why…

Aside from being Chief Investment Strategist for Investment U, I also oversee the investment decisions of The Oxford Club – an exclusive community of like-minded investors. As I write, we currently have 21 open positions in our Oxford Trading Portfolio. Our average gain on open positions is 36 percent, even though our average holding period is 197 days.

During this volatile year, we also stopped out of 17 other positions. Five of these were sold at a loss. The other 12 were profitable. Our average total return on these 17 trades was 21 percent. (By comparison, the S&P 500 is up two percent for the year.)

One of the reasons we’ve prospered is that we ignored all the macro-economic squawking from week to week and focused instead on finding great businesses selling at compelling prices.

“That all sounds well and good,” an investor told me the other day. “But what are you going to do when the Eurozone collapses?”

Despite all the gloomy forecasts, that won’t happen.

One of the main reasons is Germany. Officials and citizens there aren’t panicking about the problems in the Eurozone because, in some important ways, they see it as an opportunity.

Yes, problems there are serious. Greece is a complete basket case. Italy, Spain, Portugal and Ireland have too much debt, too. But their problems are more manageable.

Germany knows this – and understands what’s at stake in the Eurozone. Germany is a world-class exporter. Yet because it shares a currency with weaker nations, its currency is cheaper and so, too, are its exports. The currency union has been like rocket fuel for Germany’s exports.

However, Germany doesn’t want to be put on the hook for bailing out smaller, spendthrift nations. And the country is particularly sensitive to criticism that it’s attempting to dominate Europe politically or economically.

So Germany is hanging back, treating the crisis much as the Republicans treated the debt-ceiling impasse earlier this year. The Germans see this as an opportunity to secure important policy concessions rather than an emergency to be solved at all costs.

Who can blame them? German unemployment is seven percent and falling. Deficits there are coming down. Germans don’t want to dictate to other union members. They want them to take responsibility and make serious reforms to their unemployment insurance system, their healthcare sector and other pieces of the welfare state.

Politically, these measures will be tough to swallow. That’s why we seen so much leadership turnover in Europe lately. But the time for half-measures is over. Even Sarkozy had told French citizens the uncomfortable truth: The state is simply unable to provide existing generous benefits much longer.

Once Europeans understand this in their bones, the necessary reforms can be made. And then, who knows, Americans may get serious about entitlement reform, too.

So don’t expect a financial catastrophe in Europe. These problems are serious and will take time to work out. But the currency crisis is a much-needed catalyst for important changes.

Recognize that and you can return to world equity markets with confidence – and start meeting your investment goals again.

Good Investing,

Alexander Green

The Best Buy Signal in 53 Years

The Best Buy Signal in 53 Years

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, August 25, 2011: Issue #1586

Just weeks before the stock market made a dramatic bottom in early 2009, I wrote an Investment U column entitled “One of The Best Buy Signals in 51 Years.”

It was one of our most widely read columns that year – and syndicated many other places, as well.

I have no idea how many readers acted on my analysis at the time. After all, the financial crisis was in full swing and investor sentiment – to quote Jed Clampett – “was lower than a hog’s jaw on market day.”

But those who bought stocks on this signal made gobs of money in the months that followed. After all, the market essentially doubled between the lows of 2009 to the highs earlier this year.

Now – for only the second time in 53 years – this uncanny signal is flashing again. Here’s what it is and why you should take advantage of one of the best and most accurate signals in stock market history…

Market Yields: Stock vs. U.S. Treasuries

In the first half of the twentieth century, investors found that if you bought stocks only when the market’s yield exceeded the yield on 10-year Treasuries, you would have been in for every single major rally.

The returns were huge – and the system made perfect sense. Stocks are riskier than bonds, market participants reasoned, so they should yield more to compensate for greater volatility and the likelihood of occasional losses.

The system worked like a charm until 1958. Then it stopped cold. Why? Because for the next 50 years, stocks never yielded more than Treasuries.

Public companies began using their cash flow to fund operations and acquisitions rather than paying out dividends to shareholders. With stock yields sharply lower, most analysts reasoned that the indicator was dead, that the yield on stocks would never again top bonds.

And, indeed, it took a full blown financial crisis but two and a half years ago to finally happen again. With the luxury of hindsight, we can see that was yet another superb buying opportunity. And today it’s happening yet again thanks to both the tremendous rally in government bonds and the socking that stocks have undergone. For only the second time since 1958, stocks are yielding more than bonds.

Granted, it’s a squeaker. As I write, the 10-year Treasury is yielding 2.07 percent. The S&P 500 yields 2.16 percent. Of course the S&P 500 Index was only created in 1957. It was the Dow that investors used in the first half of the last century. And the yield on the Dow is more than 50 percent higher at 3.24 percent.

History Says… Stocks Are a Terrific Long-Term Buy

If history is any guide, that means stocks are a terrific long-term “Buy” right now and Treasuries – which have become a complete bubble and a table-pounding “Sell” in my estimation – are due for a long period of underperformance.

True, GDP growth is likely to be anemic in the months ahead. But – shocking and surprising most investors – stocks (and especially dividend-paying stocks) should do exceptionally well.

There are no guarantees in the world of stock market investing, of course. But as Patrick Henry famously said, “I know no way of judging the future but by the past.”

Good investing,

Alexander Green

Editor’s Note: So how can you capitalize on the best buy signal in the last 53 years? As Alex said, it’s important to focus on dividend-paying stocks… And the best way to read Alex’s favorite picks and his regular market commentary is to join The Oxford Club…

Is It Different This Time?

Is It Different This Time?

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, August 22, 2011: Issue #1583

Investment legend John Templeton famously said that the biggest mistake an investor can make is to say “this time it’s different.”

In some ways, this statement may seem a little strange.  On the surface, every market correction is different. For example, when the stock market imploded on October 19, 1987, falling over 22 percent in a single session, that was unexpected. After all, no government failed that morning. No currency collapsed. No President was shot. To this day, pundits still argue about why the stock market crashed.

Or how about the bear market of 1990? No one foresaw Saddam Hussein rolling into Kuwait that August, taking over the country and its oil fields. Investors worldwide speculated that the Middle East would go up in flames. (And, indeed, many Kuwaiti oil fields did.) That was certainly different.

Then there was the collapse of hedge fund giant Long-Term Capital in 1998. Fed Chairman Alan Greenspan feared that unwinding the fund’s highly leveraged positions would turn the bond market upside down. He worked behind the scenes to get major Wall Street firms to help bail out the fund. That was something new.

Or how about the March 2000 to October 2002 bear market that started with the collapse of technology and Internet stocks? It was the end of an era, the deflating of a bubble. We hadn’t seen anything like that in modern history.

Or how about 9/11? Who woke up that day suspecting that a group of zealots would fly planes full of people into buildings? Not me.

The mania for residential real estate six years ago was something curious, too. And so was the collapse of sub-prime mortgages. That led to an unprecedented financial crisis and a harrowing drop in the Dow. You don’t see something like that every day.

So was Templeton out of his mind when he declared it foolish to say “this time it’s different?” Of course not. Templeton well understood that the particular events that cause a market decline will always vary. What shouldn’t vary is the way you respond to it as an investor.

If you bought into the market crash of 1987, you did very well over the next few years.  After the bear market of 1990, stocks went on a remarkable 10-year run. If you bought into the secular bear market of 2000 to 2002, you also made out handily over the next five years. And, of course, the market almost doubled from the lows of the financial crisis in 2009.

Here we are today and the stock market has swooned again, this time due to sovereign debt problems here and in Europe. Nothing like this has happened in recent history.

So the question you face now is whether to take advantage of the sell-off and buy great companies at bargain prices or… to insist “this time’s it’s different.”

The choice is yours.

Good investing,

Alexander Green

How to Play the Collapse of the Euro

How to Play the Collapse of the Euro

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, July 28, 2011: Issue #1566

The Eurozone is a sight to behold.

Economic growth is anemic. Greece is careening toward default on its sovereign debt. Ireland, Italy, Portugal and Spain may not be far behind. The break-up of the currency block can’t be ruled out.

And yet … the currency is up seven percent against the dollar this year, to over $1.40. How long can this gravity-defying feat continue?

Not indefinitely. Understand that the rise in the euro against the dollar is, in part, a reflection of our own economic and political woes here at home. The Swiss franc, for instance, is up 16 percent against the dollar year to date and more than 30 percent over the past year. (And Switzerland, a landlocked nation with a smaller population than New York City, is hardly an economic powerhouse.)

Yet economic and political problems in the Eurozone are much more severe than they are here. Debt as a percentage of GDP is higher in many countries. There are no good political solutions. In the months ahead, boatloads of money will be made betting against the euro…

The Eurozone’s Debt-Disaster Continues

Richer Eurozone countries like Germany and France are tired of bailing out their more profligate brethren. The citizens of weaker countries are angry that monetary policy has been outsourced to Frankfurt and their governments are being forced to adopt harsh austerity measures.

In Spain, for instance, unemployment is 21 percent. The typical Spaniard would love to see the local currency devalued to increase the attractiveness of its exports and seaside resorts. But the peseta is long gone – and so are any opportunities to manipulate fiscal and monetary measures to kick-start the Spanish economy.

Even more ominous, there’s no mechanism in place for any of these weaker countries to leave the Eurozone.  Even if Greece could drop out, for instance, it would be a disaster for that country. Its debts would have to be re-denominated in a new currency, causing interest rates to skyrocket, deficits to worsen and economic growth to crumble.  And since European banks own huge amounts of Greek debt, the chaos would only spread.

This is what it means to be stuck between a rock and a hard place.

Greek citizens are angry that other countries are dictating their domestic policies. This is equally true for the other weak sisters in the Eurozone. Many of them chafe at the idea of staying and yet can’t imagine leaving, either.

Given this structural problem, the likelihood is that the euro will fall substantially in the weeks and months ahead and perhaps trade at parity with the dollar, as it did in the 90s.

How Do You Play the Collapse of the Euro?

Personally, I think it’s far too risky to bet against the euro with futures and options. Far superior, in my view, is an exchange-traded fund (ETF) that bets against the euro: Market Vectors Double Short Euro ETN (NYSE: DRR).

This fund is double short the euro. That means if the euro falls 15 percent, the fund will appreciate approximately 30 percent. The reverse is also true, of course. But the problems in the Eurozone are not going away any time soon. It’s tough to imagine the euro staging much of a rally from here.

Far more likely is that the euro will slide as problems in this part of the world worsen. And that will be good news for holders of this double-short ETF.

Good investing,

Alexander Green

[Editor's Note: You've just read Alex's recommendation on how to play the crisis in Europe. But what about the current debt crisis in the United States? Well... you can learn all of Alex's recommendations on how to play the markets during these uncertain times by becoming a member of The Oxford Club.

As The Oxford Club's Investment Director, Alex Green, has been ranked by The Hulbert Financial Digest - the industry's top watchdog - as high as third in the nation overall for his stock selections. And currently his portfolio ranks fifth for performance based on its 10-year, risk-adjusted return. For more information, go here now.]

Why the Sun is Setting on Gold

Why the Sun is Setting on Gold

by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, February 22, 2011

Six weeks ago, I wrote a column advising short-term speculators to sell their gold.

Since that time, the metal has drifted lower. But the brunt of the decline is likely still ahead.

As I’ve said before, gold is difficult to value under the best of circumstances. It pays no interest, has no earnings, provides no rent. What gold will be worth next week or next month is whatever buyers will pay for it at the time. And that, in technical terms, is a guess.

I’ve heard gold bugs make their case. Some are based on emotion. Others are based on political fantasies about the Federal Reserve turning us into the Weimar Republic circa 1923, or modern-day Zimbabwe.

What I rarely hear them talking about is pedestrian stuff like supply and demand…

When Buyers Become Sellers, Look Out Below

Billions of dollars have been spent building gold mines over the last few years, so it’s not inconceivable that supply could begin to outstrip demand.

Of course, demand itself is fickle.

In 2005, investors made up just 16% of total demand for gold. Today, it’s more than 40%. Gold ETFs have taken in more than $50 billion since 2004.

What will happen to the price of gold when these buyers become net sellers, as many will when it becomes clear that the party is over? Paulson & Co., a hedge fund, now holds more than $4 billion in the SPDR Gold Trust ETF (NYSE: GLD). I wouldn’t want to be standing in front of his eventual liquidation. And, like most hedge fund managers, Paulson is not a “buy-and-hold” investor.

Some bulls justify buying gold at these levels because it briefly traded at more than $800 an ounce in 1980. And they say if you simply adjust for inflation, gold should be trading at $2,300 today.

That’s weak. Here’s why…

Don’t Be Blinded by the Gold Light

Gold badly underperformed inflation – not to mention stocks, bonds, real estate and burying your money in a hole – for 20 years after 1980. Why is it suddenly destined to catch up now?

Or look at it another way: On August 25, 1999, gold traded at $252.55 an ounce. Adjusting for inflation, gold should be trading at $339.65 an ounce today.

Granted, my starting point is the 30-year-low. But then, a calculation based on the 1980 high is just as arbitrary.

It’s understandable that gold spiked during the 2007-2009 financial crisis. Gold is an excellent barometer of investor anxiety. But that crisis is over. The recession – defined as two straight quarters of negative GDP growth – ended in June 2009. And inflation is running at just 1.2%.

So why is gold still in the stratosphere?

What to Do With Your Gold Holdings Now

Yes, I know the price of food, gasoline, health care and college tuition are all going up much faster than the official inflation rate. But let’s also concede that the price of cars, computers, appliances, electronics, furniture and, not insignificantly, homes – the biggest asset most consumers will ever buy – is coming decidedly down.

Experienced investors know that after an asset has made a huge run, the little guy – forever a day late and a dollar short – starts clamoring for a piece of the action. At that point, the bloom is off the rose. It’s too late to buy and generally high time to sell.

Take my old neighbors, Sam and Brian. They lost their shirts in Internet stocks in 2000-2002. Now they’re stuck with huge negative equity in Florida condos that they bought pre-construction – a “no-brainer” in 2005.

So what are they doing with their rapidly vanishing capital today?

You guessed it. Now that gold is up five-fold in the last 10 years and three-fold in the last five years, they’re convinced that a big move lies just ahead.

Maybe. But what’s certain is that one lies just behind.

My advice? Keep your gold bullion and blue-chip mining stocks that you own as an inflation-hedge or part of your long-term asset allocation.

But if you’re counting on gold to dash higher, note that the last time investors bought into a gold mania it took more than 25 years for them to break even – not counting inflation.

As Mark Twain famously said, “History may not repeat itself. But it rhymes.”

Good investing,

Alexander Green