My High Dividend Stocks Blog http://myhighdividendstocks.posterous.com Most recent posts at My High Dividend Stocks Blog posterous.com Fri, 17 Aug 2012 12:31:49 -0700 TIP OF THE WEEK - Avoid Bank Safe Deposit Boxes For Valuables http://myhighdividendstocks.posterous.com/tip-of-the-week-avoid-bank-safe-deposit-boxes http://myhighdividendstocks.posterous.com/tip-of-the-week-avoid-bank-safe-deposit-boxes

Avoid Bank Safe Deposit Boxes

Jason Brizic

August 17th, 2012

This story should concern you if you value your privacy and have a safe deposit box.

Your possessions such as precious metals and family heirlooms are not safe in a bank safe deposit box.

Bank officers can get into your safe deposit box for flimsy reasons.  They will also open your box if a government agent has some paperwork to open it.

Here is just one reason why you should avoid bank safe deposit boxes:

http://www.youtube.com/embed/ygG29W0DQno

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Fri, 27 Jul 2012 12:24:19 -0700 TIP OF THE WEEK: An Open Letter to Warren Buffett http://myhighdividendstocks.posterous.com/tip-of-the-week-an-open-letter-to-warren-buff http://myhighdividendstocks.posterous.com/tip-of-the-week-an-open-letter-to-warren-buff

Warren Buffett is a genius investor but an economic ignoramus.  He has been paraded around by statists in government for his willingness to be taxed more.

This is a excellent article on why Warren Buffett should stop acting like a guilt ridden billionaire who wants the government to raise taxes on everyone.  It explains in very clear terms why Marx’s exploitation theory is complete wrong and why capitalism has improved all individuals standards of living.

http://mises.org/daily/6134/An-Open-Letter-to-Warren-Buffett

Be seeing you!

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Thu, 05 Jul 2012 15:18:03 -0700 TIP OF THE WEEK: Read Mises on Money for free. http://myhighdividendstocks.posterous.com/tip-of-the-week-read-mises-on-money-for-free http://myhighdividendstocks.posterous.com/tip-of-the-week-read-mises-on-money-for-free

Avoid bad investments based on Keynesian economics.  Gary North explains Mises valuable contribution to Austrian economics.

Gary North's Tip of the Week - June 23, 2012 Money Book
                        =========================
                        My new book on money in now online. I am offering it to you for the price of toner
and paper.

                        The book presents what is known as the Austrian theory of the business cycle:
booms and busts. This theory was first presented a century ago by Ludwig von
Mises.

                        If you have never read what Mises wrote on money, but you really do want to know
what is going on today with the banking system, this book presents it in five
short chapters.

                        I am easier to read than Mises was. This will get you started.

                        http://www.garynorth.com/public/9689.cfm

                        Gary "Sound Money" North

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Fri, 20 Apr 2012 14:46:56 -0700 TIP OF THE WEEK - What the Heck is Working Capital and Why Should You Care? http://myhighdividendstocks.posterous.com/tip-of-the-week-what-the-heck-is-working-capi http://myhighdividendstocks.posterous.com/tip-of-the-week-what-the-heck-is-working-capi

What the Heck is Working Capital and Why Should You Care?

Jason Brizic

April 20st, 2011

You need to know what working capital is because it is one of the indicators of balance sheet strength.

Follow Benjamin Graham’s advice on the importance of working capital.  The following passage comes from the 1937 book The Interpretation of Financial Statements Chapter XII:

            In studying what is called the “current position” of an enterprise, we never consider the current assets by themselves, but only in relation to the current liabilities.  The current position involves two important factors: (a) the excess of current assets over current liabilities – known as the Net Current Assets or the Working Capital, and (b) the ratio of current assets to current liabilities – known as the Current Ratio.

            The Working Capital is found by subtracting the current liabilities from the current assets.  Working Capital is a consideration of major importance in determining financial strength of an industrial enterprise, and it deserves attention also in the analysis of public utility and railroad securities.

            In the working capital is found the measure of the company’s ability to carry on its normal business comfortably and without financial stringency, to expand its operations without the need of new financing, and to meet emergencies and losses without disaster.  The investment in plant account (or fixed assets) is of little aid in meeting these demands.  Shortage of working capital, at its very least, results in slow payment of bills with attendant poor credit rating, in curtailment of operations and rejection of desirable business, and in a general inability to “turn around” and make progress.  Its more serious consequence is insolvency and the bankruptcy court.

            The proper amount of working capital required by a particular enterprise will depend upon both the amount and the character of its business.  The chief point of comparison is the amount of working capital per dollar of sales.  A company doing business for cash and enjoying a rapid turnover of inventory – for example, a chain grocery enterprise – needs a much lower working capital compared with sales than does the manufacturer of heavy machinery sold on long-term payments.

            The working capital is also studied in relation to fixed assets and to capitalization, especially the funded debt and preferred stock.  A good industrial bond or preferred stock is expected, in most cases, to be entirely covered in amount by the net current assets.  The working capital available for each share of common stock is an interesting figure in common stock analysis.  The growth or decline of the working capital position over a period of years is also worthy of the investor’s attention.

            In the field of railroads and public utilities, the working capital item is not scrutinized as carefully as in the case of industrials.  The nature of these service enterprises is such as to require relatively little investment in receivables or inventory (supplies).  It has been customary to provide for expansion by means of new financing rather than out of surplus cash.  A prosperous utility may at times permit its current liabilities to exceed its current assets, replenishing the working capital position a little later as part of its financing program.

            The careful investor, however, will prefer utility and railroad companies that consistently show a comfortable working capital situation.

Let’s take a look at Safe Bulkers (SB) working capital situation from the past few years (Source: Morningstar.com).  Safe Bulkers financial strength has been eroding along with the dry bulk shipping market.

12/2007

12/2008

12/2009

12/2010

12/2011

Total Current Assets

$98,883,000

$88,086,000

$105,648,000

$104,276,000

$37,959,000

Total Current Liabilities

$43,984,000

$70,863,000

$65,551,000

$52,983,000

$51,673,000

Working Capital

$54,899,000

$17,223,000

$40,097,000

$51,293,000

($13,714,000)

Current Ratio

2.25

1.24

1.61

1.97

0.73

Revenues

$165,848,000

$200,772,000

$164,606,000

$157,020,000

$168,908,000

WC as % of Revenue

33.1%

8.6%

24.4%

32.7%

N/A

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Fri, 06 Apr 2012 15:32:56 -0700 TIP OF THE WEEK - Book Value or Equity and How to Calculate Book Value per Share http://myhighdividendstocks.posterous.com/tip-of-the-week-book-value-or-equity-and-how http://myhighdividendstocks.posterous.com/tip-of-the-week-book-value-or-equity-and-how

Book Value or Equity and How to Calculate Book Value per Share

Jason Brizic

April 6th, 2012

Knowing the book value of a company helps the intelligent investor to buy low.

You want to buy assets that produce profits as cheap as possible.

The following comes from Benjamin Graham’s 1937 book The Interpretation of Financial Statements.

The book value of a security is in most cases a rather artificial value.  It is assumed that if the company were to liquidate, it would receive in cash the value at which its various tangible assets are carried on the books.  Then the amounts applicable to the various securities in their due order would be their book value.  (The word “equity” is frequently used instead of book value in this sense, but it is generally applied only to common stocks and to speculative senior securities.)

As a matter of fact, if the company were actually liquidated the value of the assets would most probably be much less than their book value as shown on the balance sheet.  An appreciable loss is likely to be realized on the sale of the inventory, and a very substantial shrinkage is almost certain to be suffered in the value of the fixed assets.  In practically every case the adverse conditions which would lead to a decision to liquidate the business would also make it impossible to obtain anywhere near cost or reproduction price for the plant and machinery.

The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.  The book value is of some importance in analysis because a very rough relationship tends to exist between the amount invested in a business and its average earnings.  It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing.  Yet in these cases some attention must be given to the book value situation, for there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive.

CALCULATING BOOK VALUE

As has already been said, in calculating book value it is assumed that the company’s assets are worth the figure shown on the balance sheet.  Indeed, book value simply means the value as shown by the books or balance sheet.

To take a simple example, a company’s balance sheet is as follows:

Fixed Property

$1,000,000

Capital Stock

$1,700,000

Good-will

500,000

Surplus

100,000

Current Assets

500,000

Current Liabilities

200,000

$2,000,000

$2,000,000

In this case the capital stock is represented by 17,000 shares of $100 par value common stock.  To find the book value of the common stock, add the $100,000 surplus to the $1,700,000 value shown for the stock, making a total of $1,800,000.  Then look on the asset side of the balance sheet for intangibles.  You will find $500,000 good-will.  This is then deducted from the $1,800,000, leaving $1,300,000 equity available for the 17,000 common shares.  Incidentally, the figure $1,300,000 is often referred to as the “net tangible assets” of the company.  Dividing this out, the net book value per share would be $76.47.

If you had not deducted the intangibles and had simply divided the $1,800,000 by the 17,000 shares you would have found the book value per share to be $105.88.  You will not that there is quite a difference between this book value and the net book value of $76.47 a share.  If only “book value” of the stock is mentioned, tangible or net book value is usually meant.  The larger figure may be termed: “Book value, including intangibles.”

I will perform this calculation on one of my favorite high dividend stocks – Safe Bulkers (SB)

Fixed Property

$777,663,000

Capital Stock

$71,000

Intangibles

0

Additional Paid-in Capital

114,918,000

Current Assets

37,959,000

Retained Earnings

216,853,000

Other Investments

11,649,000

Current Liabilities

51,673,000

Other Long Term Assets

50,000,000

Non-current Liabilities

493,756,000

$877,271,000

$877,271,000

All of this balance sheet information is as of 4Q 2011.  Safe Bulkers has since added another 5,750,000 shares and $37,375,000 in additional paid-in capital since the 4Q 2011 report.  Safe Bulkers had 70,896,924 shares at the time of the 4Q 2011 financials report.

Safe Bulkers had $331,842,000 in book value at the end of 4Q 2011 (equity values – intangibles; highlighted in yellow above).  Divided that by 70,896,924 shares and you get a book value per share of $4.68.  That would be a very nice, low price to buy Safe Bulkers at.  Safe Bulkers sold for $3.00 - $2.50 per share at the depths of the 2009 recession.

Safe Bulkers book value per share rises to $4.82 if you include the additional paid-in capital the company raised after 4Q 2011.  This also assumes they didn’t incur any new liabilities in the meantime either.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 02 Mar 2012 15:05:15 -0800 TIP OF THE WEEK: Have you ever wondered how much things cost in gold? PricedInGold.com does it for you. http://myhighdividendstocks.posterous.com/tip-of-the-week-have-you-ever-wondered-how-mu http://myhighdividendstocks.posterous.com/tip-of-the-week-have-you-ever-wondered-how-mu

Have you ever wondered how much things cost in gold?  PricedInGold.com does it for you.

Jason Brizic

March 2nd, 2012

Prices can be expressed many ways.  In a barter economy the price of fish can be expressed in terms of any other good.  “I’ll give you 12 eggs for 1 fish.”  The price of the fish is 12 eggs.  It can be said another way: the price of one egg is 1/12th of a fish.   Barter is tedious because both owners of goods have to want what the other guy is willing to part with.  This is called double coincidence of wants.  Money solves this problem.  It acts as a medium of exchange.  Mr. A has eggs.  He trades them to Mr. B for some silver coins.  Mr. A has silver now.  He wants fish.  He trades Mr. C some silver coins for fish.  Everyone is happy.  Money is the most marketable commodity.  It make exchange of goods easier than barter.

All prices in the US are expressed in dollars because of immoral legal tender laws.  There is a website that allow you to see many interesting prices expressed in weights of gold.  Not only does it show the current price, but it shows the historical price going back over a hundred years.  Prices can be measured in troy ounces of gold or gold grams.  Gold grams are a good measurement for smaller goods such as barrels of oil or food.  Here is the conversion formula for troy ounces to grams:

one troy ounce = 31.1034768 grams

As you can see in the long term chart below, oil is a volatile commodity, with it's price swinging wildly in a range from less than 1 gram per barrel to almost 5 grams per barrel. But this chart also shows that these oscillations are part of a sideways price movement centered around 2.5 grams per barrel. Crude's current price around 2 grams is a bit below it's long term average.

Of course, the fluctuating value of the dollar makes it very hard to gauge whether oil prices themselves are rising or falling… Oil today at 2 grams, is about the same as it was in the early 1950s; but if you measure the price in US dollars, you would get the impression that it is about 30 times more expensive today!

Crude Oil, West Texas Intermediate From 1950:

To see dozens of more prices expressed in gold go to www.pricedingold.com

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Tue, 21 Feb 2012 12:21:25 -0800 TIP OF THE WEEK - Why you should purchase rolls of nickels from your bank. http://myhighdividendstocks.posterous.com/tip-of-the-week-why-you-should-purchase-rolls http://myhighdividendstocks.posterous.com/tip-of-the-week-why-you-should-purchase-rolls

Why you should purchase rolls of nickels from your bank.

Jason Brizic

February 17th, 2012

Gresham’s law states that “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”  This is what happened to the 90% pre-1963 silver dimes and quarters in the US.  It has happened to copper pennies.  And it is about to happen nickels.

http://en.wikipedia.org/wiki/Gresham%27s_law

Americans had the opportunity to buy and hold 90% silver coins before 1963 cheaply.  Those that did so were smart.  Gresham’s law took effect.  You will almost never happen upon a 90% silver dime or quarter anymore.  Most of them have been picked out of circulation.  Today, the 90% silver coins are valued for their metal content and not their face value anymore.  You have an opportunity to buy nickel at less than spot market price.  You can resell them later at a profit. 

The composition of the US nickel has been unchanged since the end of WWII.  The nickel is 75% copper and 25% nickel.  It costs the US government 11.2 cents to produce the 5 cent nickel.  They are broke and they need to cut government costs wherever it is easiest.  The voters don’t care about the composition of the coinage.  So, the US government is proposing changes to the composition of the nickel.

http://money.cnn.com/2012/02/15/news/economy/pennies_nickels/

The website www.coinflation.com calculates the daily metal value of all US coins.  The metal inside a nickel is worth 5.6 cents.  Nickel is selling for $9.07 per pound and copper is selling for $3.78 per pound in commodity markets today.  Buy low at 5 cents and sell high at 5.6 cents.  That is a 12.68% return on invested capital at today’s prices.  However, there is no market for coinage nickels right now because there is only one type of nickel.  You will have to wait to make any money off Gresham’s law.

The potential return on investment (ROI) is much higher.  About a year ago when nickel was selling for over $10.00 per pound and copper was over $4.00 per pound the metal in a single nickel was worth 6.2 cents.  That is a ROI of 24%.

The long term prospects for the price of copper and nickel are up.  Central bank monetary inflation will continue to erode the purchasing power of the dollar.  The price of nickel and copper expressed in dollars will continue to increase with monetary inflation.  A relapse of the world economy into recession will have the opposite effect on the price on copper and nickel.  So, in the short term the price of nickel and copper will go down, but long term the price will go up.

Buy nickels in two dollar rolls from you local bank.  You don’t have to sort nickels since there is only one composition of nickels in circulation.  The pre-1982 copper pennies are worth 2.5 cents (150% ROI), but you have to find them and separate them from all the zinc pennies.  That is a very labor intensive process.  I performed a test.  It took me one hour to sort through $10.00 of pennies.  Only about 15% were copper pennies (Gresham’s law again).  1 hour of labor yielded $1.50 in copper pennies worth $3.75 in metal.  Time is money.  I could have bought $100 in nickels in five minutes at a bank and been done with it.  No sorting necessary.  The best part is that your nickels are always worth their face value.  It is a guaranteed investment so long as you are patient.

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http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 10 Feb 2012 15:01:04 -0800 TIP OF THE WEEK: The Federal Reserve Is Not Holding Down the FED Funds Rate, But I Know Who Is. http://myhighdividendstocks.posterous.com/tip-of-the-week-the-federal-reserve-is-not-ho http://myhighdividendstocks.posterous.com/tip-of-the-week-the-federal-reserve-is-not-ho

The Federal Reserve Is Not Holding Down the FED Funds Rate, But I Know Who Is.

Jason Brizic

February 10th, 2011

The Federal Reserve pretends to control interest rates through the use the FED funds rate.  http://www.federalreserve.gov/monetarypolicy/openmarket.htm

I see this all the time in financial articles.  Pick any of these articles (http://tinyurl.com/7vurwdx) and you will see moronic language like this:

“Federal Reserve officials said they expect short-term interest rates to stay close to zero "at least through late 2014." The Fed has been trying to give more explicit guidance on what it expects in the future as part of a broader move to greater transparency.”

The FED claims that it is holding this key interest rate low until at least 2014 using the federal funds target rate.  Here is the definition of the FED funds rate from its Wikipedia entry:

In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.[1][2]

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

The commercial bankers (aka depository institutions) have decided not to loan out all the money the FED created for them during the bailouts of 2008-2009.  They are holding over $1.5 trillion dollars in excess reserves.

Therefore, they don’t need to make overnight loans to one another to satisfy the legal reserve requirements. These bankers are scared to make loans in this horrible economic environment.  I don’t blame them for being scared.  They have decided to park the money back at the FED and the FED is paying them 0.25% interest to store it for them.  This has caused the federal funds effective rate to drop to 0%. 

The FED could get the banks to lend the $1.5 trillion dollars into the economy by imposing a fee on excess reserves.  But that would create hyperinflation in the money supply and prices would rise over 100% in a few months.  The FED doesn’t want that to happen, so they pretend to be in control of the federal funds effective rate when the terrified bankers really are.  The bottom line is that there will be no economic recovery until bankers increase their lending.  That means we will experience a double-dip recession regardless of what happens in Europe or China.  I’m waiting for much lower stock prices to buy high dividend stocks with earning power and strong balance sheets.

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http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 20 Jan 2012 11:56:05 -0800 TIP OF THE WEEK - Register your stocks in your own name http://myhighdividendstocks.posterous.com/tip-of-the-week-register-your-stocks-in-your http://myhighdividendstocks.posterous.com/tip-of-the-week-register-your-stocks-in-your

Register your stocks in your own name

Jason Brizic

January 20th, 2011

The MF Global bankruptcy proved one very important thing.  It proved that your assets are not your assets if you allow your broker to register them in their street name.  In fact, your brokerage can use your assets as their own to make risky derivative bets.  And when they go bust due to bad leveraged bets, then your assets can go to their creditors instead of to you.  This is what just happened in the MF Global bankruptcy.

Protect yourself by registering the stocks you own in your name.

Call your broker and tell them that you want all your stocks registered in your name.  Tell them you don’t want them in street name anymore.  There is a cost to this.  It will cost you time and some money each time you sell your stock certificates, but this is the price you must pay to secure your assets from brokerage theft.  If you are not willing to do this, then you probably should not own stocks.

This will make life very difficult for day traders, but much safer if you are a high dividend stock investor.  The high dividend stock investor buys when companies with earning power and strong balance sheets are priced at a deep discount.  He sells the stocks he owns when the company is not likely to deliver high dividend yields and when earning power and balance sheet strength diminishes.  This usually doesn’t happen overnight, so you can afford to register your stocks in your own name.

Here is an article by Gary North that summarizes the problem nicely.

* * * * * * * * * *

A lot of Americans do not know how ownership of stocks is handled. They think they personally own the stocks in their portfolios. They don’t.

There were investors in MF Global who thought they owned commodities. They didn’t.

Consider this.

Do you own gold and silver mining stocks? Or any stocks for that matter? Even if you say, “yes”, chances are you don’t really own them.

It is one of the dirtiest little secrets in the brokerage business. And 99.9% of people have no idea it is even being done to them. It’s called “street name registration” and it’s how the brokerage where you hold your stocks “registers” your shares. To save money and time, and to allow your shares to be included as assets that they can use to do what they want with, your brokerage never actually registers you as an owner of the shares.

Street name registration allows your broker to lend your shares to short sellers, thereby driving down the price of your own stocks. Additionally, this method allows your broker to “re-hypothecate” your assets–meaning it allows your broker to borrow money against your shares and speculate in the derivatives market.

These hidden risks are planting the seeds of tomorrow’s ultimate collapse – In which there may be a system-wide collapse of broker dealers, taking down millions of investors, and ensuring permanent non-recoverable losses to an entire generation!

Too extreme? Maybe. But consider this:

MF Global investors found out first hand just how secure their funds were. Most don’t realize it, but MF Global was a clearing house for both stocks and futures. Like many/most brokerages, they “invest” their own funds, often on a highly leveraged basis, to earn income. But, with the recent collapse of Greek government bonds and with MF Global’s highly leveraged position in them, MF Global was bankrupted in an instant.

The problem is, they tried to cover their losses with their customer’s own funds. You see, unless your shares are registered in your own name – a process that isn’t that difficult or costly – your brokerage considers it as assets they can use for their own needs.

Plus, once a brokerage goes bankrupt (which is something we expect to happen very often over the coming years) if you hadn’t personally registered your shares then your shares go down as assets of the brokerage and are used to pay off their creditors.

In normal times, this does not happen. We are heading into abnormal times.

Some believe their stocks will be protected by the Securities Investor Protection Corporation (SIPC), which insures stocks accounts from broker collapse up to $500k for securities, and account cash balances up to $250k. But what if you have more than $250k in cash and/or more than $500k of securities in your account? What if one of the largest broker dealers in the country went bust, bringing down thousands of accounts and depleting the entire reserves of the SIPC? What if the SIPC itself goes bankrupt? What few people are aware of, is that the SIPC only carries about $1 billion in funds to cover investors! This means only one or two high profile broker dealer bankruptcies will be enough to completely wipe out the SIPC.

Some may claim the US government will bail out the SIPC to whatever extent needed. But what if two major broker dealers went bust while at the same time the US government suffers a major Treasury bond auction failure? This is all but a certainty in the coming years.

And the same thing applies in Canada to Canadian brokerages and Canadian stocks. The Canadian economy is intricately tied to the US. In fact, not many people are aware, but all that backs the Canadian dollar is the US dollar. The Canadian Government sold all its gold decades ago.

There’s lots more to learn here. Read the full article.

Continue Reading on www.resourceinvestor.com

* * * * * * * * * *

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Fri, 16 Dec 2011 11:00:59 -0800 TIP OF THE WEEK - Why MF Global went down and how you can protect your life's savings http://myhighdividendstocks.posterous.com/tip-of-the-week-why-mf-global-went-down-and-h http://myhighdividendstocks.posterous.com/tip-of-the-week-why-mf-global-went-down-and-h

December 16th, 2011

Jason Brizic

Investment institutions (like MF Global) can legally steal your assets and use your property for their own purposes.  They can do this because you have agreed to let them do this by consenting to their customer agreements.  Read the article below by Austrian economist, Doug French, for a devastatingly clear explanation of what killed MF Global and it customer’s [victims] savings.

Your savings and investments may not be safe in your brokerage accounts depending on the fine print in the agreements you consented to.  Some financial corporations have agreements that allows them to use your assets as their collateral in their bets in the derivatives markets.  Other financial corporation’s only claim to do this with your margin accounts; therefore, standard brokerage accounts and retirement accounts would remain untouched in that situation.

This means that an investor who had $100,000 in a money market account with MF Global could still be wiped out by the MF Global bankruptcy.  Most people think that their brokerage money is safe in money markets, but that is not necessarily the case depending on the customer agreements you entered into.

Action steps:

1)    Go to Google and perform a search using the name of your financial institution plus the word rehypothecation.  The results might scare you.

a.    For example Fidelity rehypothecation yields the following results: http://www.google.com/search?q=fidelity+rehypothecation&rls=com.microsoft:*&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1

b.    Click through a couple of the results until you find someone who dug out the applicable fine print from the customer agreements

2)    If the fine print says anything like what MF Global’s fine print said, then you have a decision to make soon.  You can keep the account or close the account.

“7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”

It isn’t clear to me at this time how the MF Global bankruptcy will be handled by the FDIC and the SIPC (http://en.wikipedia.org/wiki/Sipc).  There are proposals in congress to change what is covered and by how much.  Regardless of the actions of congress, ultimately the FDIC and SIPC are empty promises because they don’t have enough money to insure the assets they claim to insure.  The Federal Reserve would have to hyper inflate the money supply to back their insurance claims.  Doug French addresses this at the end of his article below.

* * * * * * * * * *

MF Global's Fractional Reserves

by Doug French

Recently by Doug French: Who Serves During Disaster?

 

 

 

Jon Corzine told the House Agriculture Committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date." The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn't know where the missing $1.2 billion in client funds went.

Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he's in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.

As a stand-alone entity, MF Global was born in 2007 when it was spun off from UK hedge-fund giant, Man Group. MF booked revenues of $4 billion that year from interest earned by using its customers' funds, an operation that sounds like fractionized banking: short-term embezzlement used to make profits.

For banks, the practice was sealed in English common law in 1811 in the court case of Carr vs. Carr, where Master of the Rolls Sir William Grant ruled that debts mentioned in a will included bank accounts since the money had been deposited into the bank and wasn't earmarked in a sealed bag. The deposit was thus a loan rather than a bailment.

The same Judge Grant ruled the same way five years later in Devaynes vs. Noble, despite an attorney's argument that "a banker is rather a bailee of his customer's funds than his debtor … because the money in … [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up."

In 1848, in Foley vs. Hill and Others, Lord Cottenham ruled,

"Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it.… The money placed in the custody of a banker to do with it as he pleases."

It's been clear sailing for bankers ever since. No questions asked.

At the same time, people are surprised that a commodity brokerage firm would misplace client assets. As Christopher Elias explains for Thomson Reuters,

"MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF's dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients' funds to finance an enormous $6.2 billion Eurozone repo bet."

Free bankers are always insisting that fractional-reserve banking is A-OK, as long as bankers inform depositors up front that the bank will be using their customers' money to make loans and investments.

That is exactly the case with MF Global. The company's customer agreements included the following clause:

7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.

Back in 2007, customer funds held by MF as collateral against commodities trades could be invested in two-year Treasuries earning north of 4.5 percent. But in the wake of the '08 meltdown, the Bernanke Fed has flattened yields to be counted in basis points. With these low rates MF Global revenues fell to $517 million in 2010.

The old bond trader Corzine thought he could juice up MF's earnings with a little financial razzle-dazzle. Thinking outside the box (and off the balance sheet), Corzine moved $16.5 billion in assets into repos. A repo involves putting up assets as collateral, assets to be repurchased later, and borrowing money against those assets. MF used an off-balance-sheet repo called a "repo-to-maturity" where the loan and the collateral in the transaction have the same maturity. US accounting rules consider the transaction a sale and the assets can be moved off the balance sheet.

Most of these assets were bonds from Italy, Spain, Belgium, Portugal, and Ireland, all paying healthy coupon rates that would easily cover the repo interest rate and provide a nice profit. MF Global would have virtually no skin in the game (their customers provided it) and be earning a nice interest-rate spread.

Although things have been rocky in euroland, the collateral value of the short-term bonds appeared safe with the guarantee provided by the European Financial Stability Facility (EFSF).

With the $16.5 billion in assets moved off its balance sheet, MF Global then ramped up a net-long sovereign-debt position of $6.2 billion on its balance sheet – exposure that was five times the company's net worth.

While the EFSF guarantee would insure against the default of the sovereign debt if the bonds were held to maturity, MF was still at risk to make margin calls, if the bonds dropped in price day-to-day. Elias writes,

"Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global's leverage reaching 40 to 1 by the time of its collapse, it didn't need a Eurozone default to trigger its downfall – all it needed was for these amplified costs to outstrip its asset base."

So while MF Global's eurozone bets had not defaulted, the company's liquidity was drained making margin calls and trying to meet short-term-debt obligations as the euro-crisis news flow out of Europe vacillated.

MF Global was able to leverage up its euroland bets by way of the rehypothecation of their clients' collateral. Hypothecation is pledging collateral for a loan. Like the mortgage on your house.

Customers of MF posted cash, gold, or securities as collateral to backstop their commodity futures and derivatives trading. MF would then take those customer assets to back its own trades and borrowing. Mr. Elias explains, "The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds."

Under US rules, a prime broker is allowed to rehypothecate assets to the value of 140 percent of the client's liability to the broker. The rules are more liberal in the United Kingdom, where there is no limit and in many cases UK brokers rehypothecate 100 percent of collateral value placed in their custody.

Elias writes that by 2007, rehypothecation was half the shadow banking system.

"Prior to Lehman Brothers' collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as 'churn'), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation."

All of this churning has created rivers of liquidity, much of it with no asset backing. And what assets do provide backing aren't the quality they used to be. The repo rules were liberalized in the Clinton era. So instead of AAA government paper being required, AA sovereign debt works just fine; after all, as James B. Stewart writes for the New York Times:

"The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultrasafe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government." [emphasis added]

Of course all this rehypothecating creates mountains of counterparty risk, all dependent on dubious collateral that has been pledged multiple times. The equivalent of having four mortgages on a house, each having been sold to other parties who have been told their mortgage is in first position. When the property value starts dropping or the borrower doesn't pay, only one lender will get there first and legal fistfights ensue.

This rehypothecation activity may be the biggest credit bubble of all time, according to Elias. J.P. Morgan alone has rehypothecated over half a trillion dollars in 2011, Morgan Stanley $410 billion, Goldman Sachs $28 billion, and the list goes on.

Americans have been told US banks have little exposure to European sovereign debt, but according to the Bank for International Settlements (BIS), US banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal, and Spain. And while Germany is considered the belle of the Continental ball, Grant's Interest Rate Observer reports that Deutsche Bank is levered at 43:1 and the Bundesbank has doubled its leverage since 2007 when it was geared at 75:1 – these days the central bank is levered at 153:1.

Extreme leverage is a problem if the slightest thing goes wrong – anywhere. When the cost of swapping euros for dollars soared at the end of last month, a coordinated central-bank cavalry charged out of nowhere, cutting swap rates and establishing temporary bilateral-liquidity swap arrangements. Nobody but financial news junkies seemed to know or care.

The truth about the financial crash wasn't known until Bloomberg chased its request for information all the way to the Supreme Court to obtain documents that shed light on how much dough the Federal Reserve really provided the banks during the 2008 meltdown.

For instance, it turns out Wachovia shareholders got lucky as the bank was floated a secret loan from the Fed of $50 billion to keep the doors open while a sale could be arranged with Wells Fargo for $7 a share rather than shareholders having to take the buck-a-share offer from the wounded Citibank.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Wachovia's chief executive Robert Steel said at the time.

Right, no government support at all.

Instead of being among the bailed out, Corzine and MF Global are now joining Lehman, IndyMac, Colonial, and all the small-fry banks lacking the friends in high places needed to keep them afloat. In the fractional-reserve world, markets don't decide the winners and losers; government does.

Stewart writes for the NYT, "SIPC will replace up to $500,000 of securities and cash (but not futures contracts) missing from customer accounts at member firms," and the notion of even covering futures accounts has been floated on CNBC by Senator Debbie Stabenow, just as the FDIC replaces deposits up to $250,000. But covering the losses of clients and depositors is hardly the reflection of sound capitalism and the honoring of property rights.

Murray Rothbard wrote,

"If no business firm can be insured, then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention 'insurance' with a straight face. 'Deposit insurance' is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public."

So it's unlikely Jon Corzine knows where the $1.2 billion in customer money went any more than the president of a failed bank would know exactly where the customer deposits went.

The bigger issue is that, day by day, Mr. Corzine looks to be merely a canary in the fractional-reserve coal mine.

Reprinted from Mises.org.

December 15, 2011

Doug French [send him mail] is president of the Ludwig von Mises Institute and the author of Early Speculative Bubbles & Increases in the Money Supply. He received the Murray N. Rothbard Award from the Center for Libertarian Studies. See his tribute to Murray Rothbard.

* * * * * * * * * *

Link to the article on LewRockwell.com: http://lewrockwell.com/french/french143.html

For more tips of the week click here: www.myhighdividendstocks.com/tip-of-the-week

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Fri, 09 Dec 2011 10:26:40 -0800 TIP OF THE WEEK - http://myhighdividendstocks.posterous.com/tip-of-the-week http://myhighdividendstocks.posterous.com/tip-of-the-week
Reuters.com has easy to find earnings estimates
December 9th, 2011
Jason Brizic
 
Knowing a company's earning power should help you determine when the company's shares are relatively value priced.  Companies are value priced when they are trading at less than 12 times average adjusted earnings.
 
I like to factor the current year's earnings into my long term average adjusted earnings.  I use Morninstar.com's website to gather the earnings per share, net income, and number of shares for the past five years.  That usually gets me 2006-2010.  But I still need 2011.  I switch the view from annual to quarterly to get Q1, Q2, and Q3 of the current year.  That leaves Q4 as an unknown.
 
This is where Reuters.com comes in.  I use Reuters.com to get an estimate for the next quarter to complete the year.  Its okay if a company beats or misses this estimate because it has little effect on a five or six year average adjusted earnings calculation.
 
Let's do this for one of my favorite stocks, Safe Bulkers (SB).  This data comes from Morningstar.com's financials tab.
(Earnings adjusted for changes in capitalization - Safe Bulkers has issued shares in the past two years)
Year        EPS       Net inc.       Shares      Adj EPS
2006        $1.78     $97 M         55 M         $1.47
2007        $3.84     $209 M       55 M         $3.17
2008        $2.19     $119 M       55 M         $1.81
2009        $3.03     $165 M       55 M         $2.50
2010        $1.73     $110 M       63 M         $1.67
 
For some reason unknown to me Morningstar.com wouldn't show me the quarterly data for Safe Bulkers, so I used Google Finance to find the data I need for Q1-Q3 2011
 
Year        EPS       Net inc.      Shares       Adj EPS
2011 Q1  $0.41     $27.31 M   65.88 M     $0.41
2011 Q2  $0.47     $31.13 M   65.88 M     $0.47
2011 Q3  $0.33     $22.01 M   65.88 M     $0.33
 
Click on the Analysts tab
Scroll down to Consensus Recommendations
You will see Safe Bulkers next quarter consensus estimate of $0.35 per share
 
Now we can complete the estimated earnings for 2011
Year        EPS       Net inc.      Shares      Adj EPS
2011 Q4  $0.35 E  $23.06 M   65.88 M    $0.35
 
Total        $1.56 E  $103.5 M   65.88 M   $1.56 E
 
Compute the six year average adjusted earnings, which equals $2.03 per share @ 65.88 million shares.  Safe Bulkers is trading at $6.16 as I write this, so it is only trading at 3.03 times its six year average earnings.  What a value especially with the 9.79% dividend yield.  However, its stock price will decline in a global recession and a China hard landing so I think you can get it even cheaper in the $3 - $4 range.
 
 
For more tips like these go to www.myhighdividendstocks.com/tip-of-the-week
 
 

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Fri, 02 Dec 2011 11:00:18 -0800 TIP OF THE WEEK - Create a budget and stick to it http://myhighdividendstocks.posterous.com/tip-of-the-week-create-a-budget-and-stick-to http://myhighdividendstocks.posterous.com/tip-of-the-week-create-a-budget-and-stick-to

Create a budget and stick to it

Jason Brizic

December 2nd, 2011

Sticking to a realistic budget will allow you to save for retirement or to create an inheritance.  You will need capital to start your side business or to start a new career that will fund your retirement.  Social Security and Medicare are the biggest ponzi schemes in the history of the world.  You can’t rely on them to fund your retirement at all if you are under age 55 right now.  So, you must budget for success later in life so you don’t end up a ward of a dying nation-state.

If you create a realistic budget and stick to it, then you will accumulate saving/capital to achieve your life and retirement goals.  You will reduce your stress levels when you stop living paycheck to paycheck.  Marriage is hard enough without the additional pressures of monthly money problems.  You will also be able to buy goods on sale for cash when you have accumulated savings.  People sell quality assets online (Ebay, Craigslist, the local classifieds) for pennies on the dollar when they get into financial troubles.  The role of the capitalist entrepreneur is to buy these assets cheap and to put them to profitable use by satisfying customers desires.

A generic goal should be to save at least 10% of your pretax monthly income for retirement.  Some people will need to save more and some will need to save less to fund their goals.  However, there are several tasks to complete first before you begin saving for retirement that some people skip.

1.     Use this money to pay down credit card and other high interest debts now (this doesn’t include your house mortgage).

2.     Once those debts are extinguished you can save this money each month to build up your 3-6 month emergency fund.  Let’s face it – there ain’t no job security in corporate America or in the government sector either.

3.     After the emergency fund is filled up you can begin saving for retirement.  I discourage the use of 401(k) plans, IRAs, and other schemes that limit your access to your own property and that the government can confiscate easily to shore up their ponzi schemes.  Here is a taste of things to come: http://www.sovereignman.com/expat/how-the-us-government-will-seize-your-retirement-account/

4.     Use your savings to capitalize your business, purchase precious metals, buy positive cash flow real estate, invest in safe high dividend stocks, and/or buy stable foreign currencies

Go to www.mint.com and create a free account.  You can easily create a budget there and monitor your progress.

P.S. Here is a link to budget for living in California on a $46,000 per year income (now that is some austerity, but considering the median household income in the USA as of 2009 was $50,221 about half of Americans are in this boat) http://www.mybudget360.com/the-perfect-46000-budget-learning-to-live-in-california-for-under-50000/ .

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 11 Nov 2011 10:37:51 -0800 TIP OF THE WEEK - It's Official: Wall Street Firms May Legally Steal From Their Customers http://myhighdividendstocks.posterous.com/tip-of-the-week-its-official-wall-street-firm http://myhighdividendstocks.posterous.com/tip-of-the-week-its-official-wall-street-firm

It’s Official: Wall Street Firms May Legally Steal From Their Customers

Jason Brizic

November 11th, 2011

Desperate people do desperate things.  Don’t make it easy for them to fleece you.

Don’t put all your financial eggs in one basket.  You should own:

·         Your own business (to generate income even in retirement)

·         Physical precious metals (gold and silver coins from you country’s mint)

·         Rental real estate (3 bedroom, 2 bath houses in neighborhoods with good schools)

·         Currencies (US dollars in printed cash, Yen in printed cash)

·         Goods (all the commercial goods you can store that you will consume anyways)

·         High dividend stocks with earning power and strong balance sheets

Wall Street firms and commodities futures firms can legally steal from their customers.  Examine your terms and conditions that you have with your brokerage firm (e.g E*Trade, ScottTrade, etc..).  Minimize your stock holdings as a percentage of your net worth.  I’m targeting only 5%-10% of my net worth for my high dividend stock portfolio.  There are great risks that are going unnoticed by most investors in the world’s bond and equity markets.

I offer this article as proof: http://www.zerohedge.com/contributed/it%E2%80%99s-official-wall-street-firms-may-legally-steal-their-customers

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 04 Nov 2011 14:42:35 -0700 TIP OF THE WEEK - There ain't no thing such as a free lunch. My tip will still cost you a small amount of time. http://myhighdividendstocks.posterous.com/tip-of-the-week-there-aint-no-thing-such-as-a http://myhighdividendstocks.posterous.com/tip-of-the-week-there-aint-no-thing-such-as-a

There ain’t no thing such as a free lunch.  My tip will still cost you a small amount of time.

Jason Brizic

November 4th, 2011

The Austrian school of economics offers a unified theory of economics.  You probably learned in high school or college the concept of “micro” and “macro” economics.  I’m here to tell you that there is no “micro” and “macro” economics.  There is only one economics based on various economic laws that can’t be overcome by politicians or central banks actions.  The price system, supply and demand, and marginal utility are few examples of economic laws that can be escaped.  There ain’t no thing as a free lunch.  In other words, resources are scarce and will be allocated by individuals who own them.  The dominant economics taught in schools is Keynesian economics.  It teaches that there is such as thing as a free lunch.  Their economics can be distilled down to the slogan, “Federal deficits overcome recessions.”

This video explains the battle between the Austrians and the Keynesians with clarity and humor.  It stars F.A. Hayek (Austrian) vs. John Maynard Keynes (Keynes himself):

Governments and central banks are everywhere in this world interfering with the markets.  Austrian economics offers a causal explanation of how these groups will effect capital and human actions.  Your investments are capital, so you have a vested interest in seeing that it is protected from the harmful actions of governments and central bankers.

You can’t beat something with nothing.  The ideas of Austrian economics can defeat the crackpot theories of Keynesian economics and the Ludwig von Mises institute is determined to do just that.

The Ludwig von Mises Institute offers for these for no money (it will cost you time):

  1. Daily articles
  2. An excellent and enlightening blog
  3. Full length books on economics and liberty (most books are in several formats: PDF, e-pubs, and HTML, etc.) Some must read books include the following:

·         Ludwig von Mises – The Theory of Money and Credit; Human Action (read Rothbard first)

·         F.A. Hayek – The Road to Serfdom

·         Murray Rothbard – Man, Economy, and State with Power and Markets

  1. Audio of articles, lectures, and full length audio books
  2. Videos of lectures, interviews, and audio books with supporting pictures

www.mises.org

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http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 28 Oct 2011 16:04:10 -0700 TIP OF THE WEEK - A Free Lesson on How to Read a Financial Report http://myhighdividendstocks.posterous.com/tip-of-the-week-a-free-lesson-on-how-to-read http://myhighdividendstocks.posterous.com/tip-of-the-week-a-free-lesson-on-how-to-read

A Free Lesson on How to Read a Financial Report

Jason Brizic

October 28, 2011

A proposed definition of INVESTMENT from “Security Analysis” 2nd ed. (1940) written by legendary investors Benjamin Graham and Christopher Dodd is particularly appropriate for this Tip of the Week.

An investment operation is one which, upon through analysis, promises safety of principal and a satisfactory return.  Operations not meeting these requirements are speculative.

The phrases thorough analysis, promises safety, and satisfactory return are all chargeable with indefiniteness, but the important point is that their meaning is clear enough to prevent serious misunderstanding.  By thorough analysis [Graham and Dodd] mean, of course, the study of the facts in the light of established standards of safety and value.  An “analysis” that recommended investment in General Electric common at a price forty times its highest earnings merely because of its excellent prospects would be clearly ruled out, as devoid of all quality of thoroughness.

The “facts” that Graham and Dodd are referring to are the financial results that are located in company’s quarterly and annual reports.  You should be able to understand how the company makes a profit, what its assets and liabilities are, and how much cash is flowing into the business.  In general, you should have a basic understanding of how to read a financial report.

Merrill Lynch has provided a short 52 page free report on “How to Read a Financial Report”  It is available for free in PDF format at this link http://tinyurl.com/63yr4qs .  I’ve read this document and it is a great introduction to the contents of the typical financial reports worldwide.

There are more free sources on how to read a financial report available from this Google search http://tinyurl.com/3dxe7xq

For more tips, go here:

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Fri, 21 Oct 2011 19:08:40 -0700 TIP OF THE WEEK - Make Good Use of Your Drive Time http://myhighdividendstocks.posterous.com/tip-of-the-week-make-good-use-of-your-drive-t http://myhighdividendstocks.posterous.com/tip-of-the-week-make-good-use-of-your-drive-t Make Good Use of Your Drive Time
October 21st, 2011

Make good use of your commute to work time. Turn off the radio. Most people have a 23 minute commute. That is enough time to listen to an article or two on your smart phone each way to work using some cool technology.

You can go to to some of your favorite financial websites like www.seekingalpha.com and copy the text of an article into a text-to-speech web app. Or you could copy portions of a quarterly financial statement to better understand how the company makes money. Threads from discussion boards make great audio articles. They are rife with pros and cons of a stock. You can begin listening to your article In about the time it would take to print the article.

I use a text to speech web app called SpokenText. It has a free trial that does not require a credit card. I pay $30.00 a year fee to use it. I use it extensively everyday.

www.spokentext.net

There a over a dozen natural sounding voices, but I use for consistently (Mike, Teagan, Charles, and Bob). These voices do not sound like the robotic voice of Stephen Hawking.

For more tips like this go to: www.myhighdividedstocks.com/tip-of-the-week

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Fri, 14 Oct 2011 12:58:36 -0700 TIP OF THE WEEK - Gold is a crisis hedge. Own some before the next crisis. http://myhighdividendstocks.posterous.com/tip-of-the-week-gold-is-a-crisis-hedge-own-so http://myhighdividendstocks.posterous.com/tip-of-the-week-gold-is-a-crisis-hedge-own-so

Gold is a crisis hedge.  Own some before the next crisis.

Jason Brizic

October 14th, 2011

Gold is a crisis hedge.  Rich people buy gold when they are fearful.

There are several good reasons for the wealthy to be fearful right now.  They own more that 80% of all stocks and bonds.  The European sovereign debt crisis is real, the USA will be bankrupted by welfare and warfare programs, and the Chinese economic bubble is going to pop.  Bonds aren’t safe, stocks aren’t safe, and interest rates are at historic lows in many economies.  Gold is a refuge from these crisis events that will not be solved through political means.

The gold price will continue to go up so long as central bankers run their printing presses.  Central bankers such as Ben Bernanke believe in Keynesian economics.  Keynesian economics can be summed up in four words: “Deficit Spending Overcomes Recessions”.  It doesn’t work, but they is what they believe and they are in charge of governments and central banks.

The Federal Reserve under Ben Bernanke has tripled the monetary base since 2008.

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Most of this money is being held by the large commercial banks as excess reserves.  It is not being loaned into the economy.

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Despite gold’s price increases it has not increased in proportion with the inflation of the monetary base.  It has not risen as much because most of the money created by the Federal Reserve has not flowed into the economy to increase the prices of everything.  The newly created money is locked away in the excess reserves of the large commercial banks.  If they were to lend it out, then prices would rise more than the 300% increase in the monetary base due to fractional reserve banking process.  Basically, one dollar added to the monetary base could become 7-10 more dollars in the M1 money supply (depending on how profligate the bankers loans are).

These are the best gold prices since the July-August 2011 timeframe.  Take this opportunity to make your first purchases of some gold coins.  Politicians will announce solutions to the sovereign debt crisis, the FED will announce better economic numbers, and the Chinese will deny they are in a bubble until it obviously pops.  Don’t believe them.  Greece will default.  They are the first domino to fall.  Nobody talks about the Medicare and Social Security unfunded liabilities.  They are too huge.  They are dozens of trillions of dollars.  The Chinese mercantilists have been inflating they currency and their economy.  When they stop their will be a severe recession in China.

Go to www.apmex.com and take a look at the one ounce gold coins from your country’s mint.  Then buy one if you have none already.  I had a good experience with American Precious Metals Exchange in the past.  I get no commissions or anything from them.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 07 Oct 2011 11:56:34 -0700 TIP OF THE WEEK - A Second Worldwide Financial Crisis is Coming http://myhighdividendstocks.posterous.com/tip-of-the-week-a-second-worldwide-financial http://myhighdividendstocks.posterous.com/tip-of-the-week-a-second-worldwide-financial

A Second Worldwide Financial Crisis is Coming

Jason Brizic

October 7, 2011

The Euro crisis is real and the Euro is doomed.  This will trigger the next global financial crisis and worldwide recession.

<a href=”http://lewrockwell.com/north/north1039.html”>Busted Euro, Busted Dream</a>

The Eurozone is just beginning to implode starting with the PIIGS.  Those governments made welfare promises that they can’t pay for (in Euros).

The PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are running budget deficits above 3% of GDP. This violates EU rules.  But the European bureaucrats are powerless to stop the violators.  You can view this on the following graph. Only Estonia had a balanced budget as of last spring. Germany was slightly above the 3% limit.

http://www.bbc.co.uk/news/business-13366011

Greece will default first.  That is obvious because one year Greek government bonds are yielding over 100%.  Ireland will likely be next and then the rest of the PIIGS will tumble which have much bigger sovereign debts.

Do you want to see how small Greece is in the whole European debt crisis?  Look at <a href:http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html>this</a> from the New York Times back in December 2010.

The northern European banks lent trillions to the PIIGS.  They will need massive bailouts that dwarf the previous bailouts.  The northern European banks bought default insurance from the American banks.  The US banks are exposed to the European soverign debt crisis also.  The yield curve is flattening and we are going into a second recession.  Plan accordingly.  Read this site to sidestep as much of the calamity as possible.

There will be a time to buy high dividend stocks with earning power and strong balance sheets down at the bottom like in March 2009.  But we aren’t there yet.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Fri, 16 Sep 2011 11:02:04 -0700 TIP OF THE WEEK - My Advice for Young People http://myhighdividendstocks.posterous.com/tip-of-the-week-my-advice-for-young-people http://myhighdividendstocks.posterous.com/tip-of-the-week-my-advice-for-young-people

My Advice for Young People

Jason Brizic

September 16th, 2011

Austrian economist and entrepreneur Robert P. Murphy provides some great advice that I’m already following.

* * * * * * * * * *

Over the last few years I've been freely dispensing financial advice to young people. I usually preface my remarks by saying, "I feel funny telling you what to do with your life, but since I'm bald you know I'm older and that I worry a lot." In the present article I'll summarize my recommendations. I am comfortable reproducing them for wide distribution, because they are conservative tips that would be appropriate in any setting, but are particularly important given my dire views on the Western economies.

Save More

It's common knowledge that if a person has the wisdom and discipline to save for the future, then he or she can eventually enjoy a permanently higher standard of living. However, it's useful to look at a numerical example — such as the one I detail in chapter 10 of my introductory textbook — to see just how significant a higher savings rate can be, on a person's future income. As Albert Einstein reputedly remarked, the most powerful force in the universe is compound interest.

Incidentally, people shouldn't feel guilty about saving more, notwithstanding the handwringing coming from mainstream economists. As I explain in my book, everybody can increase his or her standard of living through saving. In other words, it's not the case that if Alice makes a better future for herself by saving a higher fraction of her income, then there must be some Bruce out there who is going deeper into debt and will suffer a lower standard of living in the future. Society really can save and invest "on net," in the sense that everybody can obtain claims to a growing stockpile of capital goods that make workers more productive.

In the current recession, it's actually more important than ever that people save more. Contrary to Keynesian warnings, if households and firms save more, they will actually speed the general economic recovery.

Develop Multiple Streams of Income

When people hear the advice to save more, they typically think that they should stop going out to lunch, and instead bring a bologna sandwich to work or school. Although one obvious way to save more each month is to reduce frivolous expenditures, that's not the main thing I have in mind.

If a person really wants to start socking away a lot more each month, the best avenue is to boost his income, not cut spending. Particularly for young people (my target audience), there may not be that much room to cut. However, there's no limit on how much (in principle) someone can earn.

Don't misunderstand me. By all means, if a 22-year-old with no steady income is making huge payments on a sports car and rent in a posh neighborhood, then obviously it would be very prudent to move to a cheaper place and to switch to a boring vehicle with 80,000 miles on it. Yet even after plucking such low-hanging fruit, everybody — especially young people — should start brainstorming about how to bring in more income.

"Incidentally, people shouldn't feel guilty about saving more, notwithstanding the handwringing coming from mainstream economists.… Society really can save and invest 'on net.'"

Notice here that I don't simply mean someone who currently works in an office should consider working nights as a waitress. In fact, that's not primarily what I have in mind. Instead, I think young people should consider a host of entrepreneurial ventures. Rather than looking for other bosses, young people should become their own bosses, at least in a few limited areas.

To some people this suggestion may sound intimidating. But notice that plenty of young people are entrepreneurs and they don't even realize it: Anybody who babysits or cuts lawns for neighbors is an entrepreneur. Such kids have to find customers (usually through word-of-mouth) and provide a service for which they get directly paid. That's what an entrepreneur does.

When I have mentioned this recommendation in public settings, sometimes students ask me what sorts of businesses they should start. The short answer is, "I don't know; that's what you need to figure out." The entrepreneur looks around and identifies a product or service that people currently lack but would be willing to pay for, in such amounts as it would be worth the entrepreneur's money and effort to provide it.

The reader should keep in mind that I'm not saying a person needs to brainstorm until finding "it," the fantastic idea that will eventually make someone rich. On the contrary, it's worthwhile doing all sorts of different ventures, so long as each one is self-contained and doesn't threaten to absorb too much time. It may take a lot of trial and error to gain the skills, confidence, and knowledge of customer demand before finding something really profitable.

As with all of my recommendations in this article, generating multiple sources of income is always a wise thing. However, in the present environment it is critical. Even someone who currently has a "good, steady job" can't be sure of his position even a year from now. A young person who inculcates that weekend business now, can expand the business in the unfortunate event of a layoff. But if that same young person, who has always (say) thought of starting a dog-walking service, tries to do so next year when the unemployment rate shoots up to 12 percent, she will be competing with that many more people. It's much better to get a fledgling business established now, during the weekends or other days off, so that the owner will already have a solid base of customers when the economy slumps again.

To reiterate, my advice is not to try to save more by looking at the monthly budget and saying, "Well, this is how much I make, and so if I cut back here, here, and here, then I can afford to put aside $250 more per month." No, I would much rather a person say, "If I cut back here, I can free up another $100 per month. And if I cleaned three houses every Saturday, then after expenses and treating myself to a nice dinner every weekend, I could save an additional $600 per month."

Sell Your TVs

"Everybody — especially young people — should start brainstorming about how to bring in more income."

The most succinct tip I can give, in order to find ways of generating new income, is to sell every TV in the house. I got rid of my TV during one of my frequent moves in grad school. At first I went through psychological withdrawal, but now it would sicken me if someone put a TV in my house. I can't imagine how much it would destroy my productivity. People can still watch their favorite shows on the computer.

Build Up at Least a Month's Worth of Expenses in Cash

Now if a person is saving more each month, the obvious question is: How should those savings be used? I think the first step — and no I'm not trying to sound like Dave Ramsey — is to accumulate at least a month's worth of cash. (Depending on the person's preferences and habits, it could be best to put this cash in a can in the closet, in a bank checking account, or in a bank savings account.)

The point of doing this is to get out of the habit of living paycheck to paycheck. Such a lifestyle is bad for (at least) three reasons: Most obvious, it leaves a person vulnerable to even a minor setback. If there is an unexpected expense, or if the person gets laid off, then obviously a small cushion of cash would be crucial.

Yet beyond this obvious justification, there are two other reasons that building up at least a one-month window of cash balances is a vital, immediate step. First, it frees up more time, especially for a person who has followed the earlier steps and is now earning income from several sources. Rather than having to run to the bank every time a new check comes in the mail, and rather than having to go online and check the bank balance every other day to make sure nothing is going to bounce, a person with at least a one-month cushion can better afford to let the paychecks and bills accumulate, then deal with them in one fell swoop. This allows for the person to spend more time focusing on the business(es), rather than stressing out about cash flow.

The other main reason the paycheck-to-paycheck mentality is destructive for the entrepreneurial person, is that the person is more prone to goof off whenever he's done enough to "get through the month." But once that critical threshold has been extended past the one-month barrier, there is little difference between having enough to pay for one month versus two or three months. Once a person takes it for granted that he will have money left in his checking account even after paying all his bills for the month, that surplus will mysteriously begin to drift upwards with each passing month.

Tithe or Give to Charity

It seems counterintuitive, but when a religious person tithes (or when a nonreligious person gives to charitable causes) there is somehow more money each month to work with. For tithing — where a person is supposed to give a specific percentage of income to the church — I think it's because the practice forces a person to stay on top of his finances.

You Can Donate Now

More generally, by focusing attention away from oneself, things become clearer and it's easier for a person to do the "responsible" things like avoiding impulse purchases and doing the extra work needed to bring in more income.

This last point is crucial for people who are suffering from depression and are in a financial hole. Part of what keeps them there is that, deep down, they don't think they deserve to live stress free like the other people they see around them, who somehow have their act together and don't let bills pile up on the kitchen table. By bringing in the church (or a charity that the person really respects), the depressed and financially beleaguered person can stop dwelling on self-loathing and instead focus on helping others.

Eliminate Variable-Rate Debt as Quickly as Possible

If a person already has a decent amount of cash on hand, I think the next goal should be to eliminate variable-rate debt as quickly as possible. The most obvious example is credit-card debt rolling over at an APR that moves with the prime rate. If the dollar crashes as many Austrian economists fear, we can expect massive jumps in interest rates. This will wipe out many people who thought they were doing just fine the month before.

Note that "eliminating" variable-rate debt doesn't have to mean paying off the balances. Using a new balance-transfer promotional offer, for example, might allow a person to lock in a fixed rate for a year or more.

I have written on these pages about the pros and cons of credit-card use. Unlike my other suggestions, this particular one — namely to get out of variable-rate debt quickly — is based on our current situation, where I believe there is a real danger of interest rates spiking with little warning.

Acquire Some Physical Gold and Silver Coins

Once a young person has accumulated at least a month's window in cash and has neutralized variable-rate debts, I think an excellent outlet for some of the saving each month is the acquisition of gold and silver coins. These don't need to be collector's items; in fact my favorite thing is "junk silver," because if the Big One comes it will be easy for other Americans to recognize US coins that were minted before the 1960s and have an easily verifiable silver content.

$25 $22

"Anybody who babysits or cuts lawns for neighbors is an entrepreneur."

From an Austro-libertarian perspective, the other great benefit of buying at least some physical gold and silver is educational: This is what genuine, market-produced commodity money feels like.

Conclusion

The above tips are mostly common sense. Except for the warning about variable-rate debt, they are good ideas in any setting. Yet they are particularly important, especially for young people, in our present environment.

In closing, I want to stress that I am by no means a role model in this arena. I can write with confidence on the above matters precisely because I have seen firsthand what happens when you don't follow those guidelines. If you want to keep your hair, you will give serious consideration to my recommendations.

Robert Murphy is an adjunct scholar of the Mises Institute, where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to "Man, Economy, and State with Power and Market," the "Human Action" Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist. Send him mail. See Robert P. Murphy's article archives.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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Sat, 03 Sep 2011 02:57:06 -0700 TIP OF THE WEEK - One of the best websites on contrarian investing http://myhighdividendstocks.posterous.com/tip-of-the-week-one-of-the-best-websites-on-c http://myhighdividendstocks.posterous.com/tip-of-the-week-one-of-the-best-websites-on-c

One of the best websites on contrarian investing

Jason Brizic

September 2, 2011

Most people follow the herd.  Contrarians go against the grain.  They buy when others sell.  They sell when others buy.  They fish the bottoms below value investors when buying equities.

They say, “You make your money when you buy.”  This is another take on “buy low; sell high”.  Contrarians practice the art and science of buying low – really low.

I discovered an excellent website called Zeal LLC that specializes in contrarian investing.  Their website is www.zealllc.com .  It’s a good blend of technical analysis and fundamental analysis.  There are several years of essays available for free.  Read a few of their current articles and you will pick up some good insight into stock and commodity markets.

Here is a sample article on the volatility index (aka the fear index).  I watch the volatility index weekly.

* * * * * * * * * *

Stock Fear Ceiling

Adam Hamilton     August 26, 2011     2923 Words

 

Fear is the greatest buy signal ever seen in the stock markets.  This overpowering emotion flares fast, driving excessive selling that rapidly hammers stock prices down to irrational oversold levels.  These fear-driven lows are the ideal time for investors and speculators to buy low, necessary before selling high later.  Provocatively stock fear has an effective ceiling, absolute levels that demand aggressive buying.

 

I mentioned this stock fear ceiling in passing a couple weeks ago in my latest essay on trading stock fear.  I heard from a surprising number of traders interested in this concept, for good reason.  If stock fear has a ceiling, it would flag the highest-probability-for-success buying opportunities ever seen.  Whenever this ceiling was hit in the future, it would be the ultimate signal to boldly deploy capital regardless of events.

 

While fear is ethereal and can’t be measured directly, plenty of sentiment indicators infer it.  The most popular by far is the famous VIX (pronounced “vicks”).  Discussed often in the financial media, this measures the implied volatility of certain S&P 500 index options.  The S&P 500 (SPX) is America’s flagship stock index tracking this nation’s biggest and best companies, and the best proxy for the stock markets as a whole.

 

The VIX uses complex formulas to analyze and weight SPX options prices expiring over the next 30 calendar days.  Traders are constantly buying and selling options based on their own near-future outlook, which bids up or drives down specific options’ prices.  The aggregate of all this short-term SPX options trading is distilled down into implied volatility, or how volatile options traders as a group expect the stock markets to be.

 

The VIX expresses this construct as an annualized percentage.  A 20 VIX reading implies that options traders expect to see the SPX move up or down at an annualized rate of 20% over the next 30 calendar days.  Since fear is a far-more immediate and powerful motivator than greed, options volatility soars after major selloffs (the time to buy low) before waning to insignificance after major rallies (the time to sell high).

 

Despite the VIX’s popularity, it is a watered-down usurper.  Today’s VIX was created in September 2003 to replace the classic VIX, which is now known as the VXO.  That original VIX only looked at options for the elite S&P 100, the top 20% of S&P 500 companies.  And it only used at-the-money options.  While this methodology lives on in the VXO, the new VIX changed how it is calculated.  Today’s VIX considers options for the entire S&P 500, including out-of-the-money ones.  This makes it less responsive to fear.

 

This is a problem for a fear gauge.  During sharp selloffs that spark intense fear, the first stocks to be sold are the biggest and most-liquid ones.  They have the large volumes and liquidity necessary to absorb the widespread exodus of capital without suffering anywhere near as much price damage as smaller less-liquid companies.  And at-the-money options’ prices are always quicker to respond (with bigger moves) than out-of-the-money ones.  So while the new VIX works, the classic VXO remains superior.

 

Fear shows up quickest and largest in at-the-money options representing the largest and most-liquid companies in the US stock markets.  Thus I continue to use the original classic-formula VIX, now known as the VXO, in my stock-market-sentiment research.  If you prefer the new-formula VIX, it would still lead to the same conclusions.  A less-responsive thermometer still gives you the temperature.  But with its history only extending back to 2003, its track record pales in comparison to the VXO’s since 1986.

 

As the classic fear gauge, the VXO is the best sentiment indicator to flesh out the concept of a fear ceiling in the stock markets.  This first chart shows the SPX superimposed over the VXO since 1996.  While the VXO’s history extends back a decade earlier, there was only one major fear spike in that entire span.  So the past 15 years out of the last quarter-century are the relevant ones to illustrate the fear ceiling.

 

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And these 15 years have been extraordinary indeed!  They witnessed the once-in-34-years transition from secular bull to secular bear in early 2000 as the Long Valuation Wave crest passed.  They saw three cyclical bulls alternating with two cyclical bears within these longer secular trends.  They encompassed booms and busts, a popular tech-stock mania and a stock panic, sovereign-debt defaults and currency routs, wars and political turmoil, unprecedented terrorist attacks, and every kind of disruption under the sun.  It’s hard to imagine a more extreme 15-year period!

 

Yet despite all this, with one notable exception I’ll get to later the VXO never materially exceeded 50.  A 50ish VXO is the absolute fear ceiling of the stock markets in normal conditions, meaning times when an ultra-rare panic or crash is not upon us.  At every single one of these 50ish approaches in the past 15 years, traders were utterly terrified, convinced the stock markets were thundering off a cliff.  Yet fear still didn’t surge any higher, I suspect it couldn’t.  VXO 50 is the effective limit.

 

When you think back to some of these events that spawned extreme fear, like August 1998’s Russian debt default or the September 2001 terrorist attacks in the US, it’s hard to imagine anything scarier.  These events and several others galvanized the whole world, sparking extraordinary anxiety and fear.  Other than ridiculous scenarios like global thermonuclear war or an alien invasion, it’s hard to imagine traders worldwide being any more frightened.

 

Yet the VXO still peaked near 50 consistently.  A 50 VXO means the annualized change options traders expected in the stock markets over the coming calendar month was 50%!  At VXO 50 options traders believe there is a one-standard-deviation chance (68%) that the S&P 100 (and broader SPX) will either soar or plunge at a 50% annualized rate over the next 30 days.  This obviously isn’t sustainable.

 

Whenever traders are terrified enough to expect such gigantic moves, which only happens after extreme selloffs, the selling has already passed.  Fear works this way in general too, with its maximum levels happening just as the threat is gone.  In a haunted house for example, it is anticipation that builds fear.  Once the actor with the bloody mask and chainsaw jumps out and screams at you, peak fear has already passed.  When options traders expect the worst is exactly when the worst has just been seen.

 

Yes, stock panics and crashes like 2008’s and 1987’s see fear soar to a whole new level and shatter the VXO 50 ceiling shown above.  But these events are exceedingly rare, and only happen at very specific times in the bull-bear cycles.  They are essentially once-in-a-generation fear super-spikes.  In normal market conditions that aren’t panics and crashes, 99%+ of the time, VXO 50ish is fear’s absolute ceiling.

 

The stock markets can be viewed as an endless sentiment wave oscillating between extreme fear and extreme greed.  If you want to buy low and sell high, you have to “be brave when others are afraid, and afraid when others are brave” as legendary contrarian investor Warren Buffett put it.  This means buying when everyone else is scared (high VXO), and selling when everyone else is greedy (low VXO).

 

The next two charts zoom in to show all the VXO 50 episodes of the past 15 years in more detail.  Since fear mushrooming extreme enough to slam into this absolute ceiling is pretty rare, I also considered lesser fear spikes running from roughly VXO 40 to VXO 50.  This is the high-probability bottoming zone all investors and speculators should welcome with open arms.

 

Every VXO closing high is labeled, along with the number of days it is offset from the actual bottom in the SPX.  Normally this is zero, VXO highs occur exactly on major SPX lows.  But sometimes the stock markets will grind along and take a week or two to bottom, slumping to a slightly-lower secondary low after fear is already bleeding off.  In addition, the best SPX gains seen within the immediate subsequent one-month and two-month periods following each VXO high are noted.

 

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As you can see, buying fear spikes is incredibly profitable.  It doesn’t matter whether the stock markets happen to be in a secular or cyclical bull or bear, they always rally sharply after fear grows too extreme.  The excessive fear forces stock prices to be battered down to irrational oversold levels, so as that unsustainable fear inevitably abates stocks soar as capital floods back in.  The gains are huge!

 

This essay would grow far too long if I analyzed every major VXO high in detail.  But take a look at the kinds of gains across all of them.  On average over this incredibly-chaotic span between 1997 and 2003, the SPX soared 13.0% sometime within the first month after a VXO peak and 16.4% sometime within the first two.  After extreme fear comes extreme rallies, running as high as +19% within one month and +24% within two!

 

These are not only incredibly-large and fast gains, but they are in the broader markets.  Many investors and speculators prefer individual stocks in leveraged sectors like commodities or technology.  Since these high-flying popular stocks are battered much lower during fear spikes, they soar much faster coming out of them.  Their gains often double or triple those seen in the broader SPX.  Buying great commodities stocks during extreme fear spikes can easily yield 50%+ gains within a couple months!

 

Since these awesome buying opportunities are rare, as the VXO doesn’t often soar into the 40s or hit its 50 ceiling, contrarian investors and speculators shouldn’t hesitate to capitalize on them.  The higher the VXO gets, the more cash (raised from selling high near the preceding interim top) should be immediately plowed into high-potential stocks you want to own.  Since these fear spikes are fleeting, this stock research into what to buy must be done well before the short-lived when to buy arrives.

 

While 1997 to 2003 may seem like irrelevant ancient history to some, it is crucial in establishing the importance of the VXO 50 fear ceiling in normal market conditions.  This next chart extends this analysis to the modern period of big fear spikes running from 2008 to 2011.  While 2008’s once-in-a-century stock panic was an obvious exception, outside of it the VXO’s high-odds bottoming zone held strong.

 

Image003

 

2008’s ultra-rare stock panic drove a fear super-spike the likes of which hadn’t been seen since the last extreme selling event in October 1987.  On October 19th, 1987 the stock markets crashed with the SPX plummeting an unbelievable 20.5% in a single trading day!  This blasted the VXO from its prior-day close of 36.4 straight up to its all-time high of 150.2!  Actual crashes easily shatter the normal stock fear ceiling.

 

After that the VXO never even came close to breaking out above 50 again until October 2008, fully 21 years later.  During another crazy-brutal selloff over a two-week period ending October 10th, the SPX plunged 25.9%!  This drove a VXO super-spike to 86.0, and a secondary selloff 6 weeks later once again pushed the VXO up to its panic peak of 87.2!  Panics also easily rocket above the VXO 50 ceiling.

 

But this certainly doesn’t mean a panic or crash should be expected every time the VXO nears 50, far from it.  These extreme selling events are exceedingly rare, so expecting them is usually irrational.  On one terrible day in US history, terrorists hijacked airplanes and flew them into skyscrapers.  So every time a jet is seen in the sky, should skyscrapers be evacuated?  Ultra-low-probability events shouldn’t be weighted highly.

 

In our entire lifetimes, we have only seen a single stock panic and a single stock crash.  Even in the past century, there have only been a couple of each!  The panics were in 1907 and 2008 while the crashes were in 1929 and 1987.  These events are exceedingly rare because it takes decades for complacency to grow extreme enough to fuel such massive fear blowouts.  They are once-in-a-generation occurrences.  Expecting another panic or crash soon after the last one is like expecting another massive wildfire in an area recently burned out by one.  It can’t happen because there isn’t sufficient time for enough new fuel to grow back in.

 

Panics are 20%+ plunges in the stock markets within a couple weeks, while crashes are 20%+ plummets within a couple days.  Panics only cascade out of lows deep and late in cyclical bears, representing the capitulation selling climax of those bears.  Crashes only erupt from multi-year highs at the ends of 17-year secular bulls.  If it hasn’t been decades since the last panic or crash, and the stock markets are not in the right place in their bull-bear cycles to spawn them, they aren’t going to happen.  They are irrelevant for fear-ceiling purposes unless the stock cycles are favorable for one, which isn’t often.

 

Since 2008’s panic there was one major fear spike last summer, but it was sloppy.  A variety of crosscurrents dragged the SPX to a secondary low after the initial VXO peak, which moderated the immediate gains considerably.  But even if you had bought stocks in that early fear spike as we did, the resulting gains over the next 6 months were huge as the SPX belatedly rallied as expected.  Many of our commodities-stock trades added during summer 2010’s fear spikes were realized last winter at 100%+ annualized gains!

 

And all this brings us to this month’s massive fear spike, where the VXO rocketed near 50 for the first time since the stock panic!  Not coincidentally, this happened to be during the second correction of this SPX cyclical bull.  Traders have been terrified in recent weeks, utterly convinced that European sovereign debt, or European banks, or Obama’s out-of-control spending, or the resulting USA debt downgrade are going to soon push the US stock markets over a cliff.  Fear has been incredibly intense.

 

But fear was equally intense during all the VXO 50 spikes in the past quarter century as well, yet the markets still rallied dramatically.  Each time the VXO slammed into its effective ceiling in normal market conditions, the SPX rallied sharply soon after.  Such extreme fear forces everyone susceptible to being scared into selling anytime soon into dumping their positions immediately.  This soon exhausts all available selling pressure leaving only buyers, who soon ignite the massive and sharp post-fear rallies.

 

Fundamentals are irrelevant when fear peaks, things always look the worst after the stock markets have fallen hard.  Sharp stock-market selloffs lead to a bearish selection bias among the financial media and traders, they choose to dwell on the most-pessimistic stories they can find while ignoring any positive ones.  After being hyper-oversold in a major fear spike, capital floods back into stocks no matter what is going on fundamentally in the global economy at large.  Bull or bear, recession or not, it doesn’t matter!

 

I started my own research into VXO spikes way back in the summer of 2002, and have been well aware of the VXO 50 ceiling ever since.  We bought aggressively each time it was seen, and recommended our subscribers do the same.  They’ve earned fortunes by steeling themselves to buy low when everyone else was scared and then later sell high when everyone else was greedy.  We bought aggressively during 2008’s stock panic too, even though I hadn’t anticipated an ultra-rare VXO super-spike.  Their great rarity makes them inherently unpredictable.  It didn’t matter though, the subsequent gains were still enormous the following year.  Excessive fear must be bought!

 

Extreme fear flags the best buying opportunities ever seen, the lowest stock prices possible.  And VXO 50 is as high as fear gets the vast, vast majority of the time.  So when this latest VXO 50 spike emerged in early August, needless to say we started buying aggressively.  In our popular Zeal Speculator weekly newsletter, we’ve added 13 new stock trades and 6 new options trades in August alone!  I fully expect these to soar to massive gains over the coming months as the stock markets inevitably recover.

 

While buying fear isn’t easy psychologically, it is necessary if you want to buy low.  Fighting the crowd yields amazing gains over time.  Since 2001, during a tough sideways-grinding secular stock bear, all 591 stock trades recommended in our newsletters have averaged annualized realized gains of +51%!  We didn’t achieve this by buying high when it felt good and selling low when everyone was scared, but by doing the exact opposite.  If you want to thrive in the stock markets, subscribe today to our acclaimed weekly or monthly newsletters!  Learn how to see the markets and trade them like a contrarian.

 

The bottom line is stock fear has a ceiling, and that is represented by a 50ish VXO.  While this ceiling won’t hold during panics and crashes, those ultra-rare once-in-a-generation events aren’t worth worrying about the vast majority of the time.  Normally whenever the VXO surges to 50, it is time to buy aggressively as fear has peaked so a huge stock-market rally is imminent.  This is true in secular and cyclical bulls and bears alike.

 

And just a few weeks ago, the VXO once again slammed into this effective ceiling.  Fear was incredibly intense, with perma-bears, chicken littles, and pessimists coming out of the woodwork to call for a continuing stock plunge.  But market history clearly shows that expecting the stock markets to head lower after a fear-ceiling approach is almost never the right bet to make.  Extreme fear should always be bought!

 

Adam Hamilton, CPA     August 26, 2011     Subscribe

Link to original article: http://www.zealllc.com/2011/fearceil.htm

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