All stocks at some point in time will go into a period of consolidation.  This is healthy as it allows the stock to digest its gains and set a new area of support from which to eventually move higher.

One long side pattern that typically yields big gains is what we call the “Right Side Of The Cup Crossover Pattern”.  Let’s take a look at SNHY:

As you can see, after a nice uptrend, SNHY consolidated its gains and traded sideways tracing out the bottom of a cup formation.  By trading sideways, it has created a trading range as outlined by the blue box.

The right side of the cup crossover occurs when SNHY cleared this blue box to the upside — that’s the point to initiate a long side trade as it usually signals that the stock is ready to build the right side of the cup.  In this case, SNHY ran from $26 to the $33-34 range in short order.   Just one or two trades like that a month will take your portfolio places.

Now let’s look at a current set-up — VHC:

Want to be alerted to set-ups like this before they trigger trades?  Visit our blog site and sign up for our free newsletter to learn more and receive our free report — “How To Outperform 90% Of Wall Street With Just $500 A Week.”

Spin off stocks are a great way to earn solid double digit profits in the market when the parent company decides to “spin off” a non-core business, thus creating a separate business.

The general definition is:

The creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. A spinoff is a type of divestiture.

When a company wants to spin off an existing business, it must file a Form 10-12b through the SEC. We will search for 10-12b forms in Edgar Online to uncover these potential spin offs.

Find Spin Off Stocks in Just 3 Easy Steps

1. Conduct a search using Edgar
2. Type into the search box the following: form-type = 10-12b
3. Press Search and view HTML documents

If you need more help, please refer to the video explaining how to find spin off stocks.

How to Make $10k per Month from Spin Off Stocks

I highly recommended purchasing the How to Hack the Stock Market course to learn how to make up to $10,000 per month from this so called loophole in the stock market. John Bell, the creator of Hack the Stock Market, also provides an automated monthly advisor service that notifies you when a new spin off stock is worth buying.

The ebook is 62 pages, and provides a clear analysis of why his strategy works and how to implement it in your investment strategy.

Photo Source: Building.co.uk

Too frequently do investors get caught up in that one hot stock, bond, or other investment that the underlying fundamentals get quickly cast to the side.  Although many stocks are good buys, and many aren’t, the reason for investing can be clouded by outside influences.

A Story Retold

This phenomenon is best exemplified by recent news that the World Cup (yes the soccer World Cup), would have a huge impact on production of precious metals in South Africa.  Since the World Cup is to be held in South Africa and the event is sure to consume far more power than the infrastructure can possibly produce, frequent brown outs at platinum production facilities are expected.  Now, as wild as this may be, this is just one of the many externalities that investors will utilize to price stocks.

Plan for the Worst

Another recent happening is the immense and tragic oil spill by oil giant BP.  The firm, which controlled a drilling operation in the Gulf of Mexico that produced some 5,000 barrels per day, has now been sold off in mass.  Investors are weary that the spill could have a large impact on BP’s earnings as lawsuit after lawsuit wipes away its 2010 profit.  BP has since dove more than 30%, which is more than twice the decline of its rival Exxon Mobil.

Now, it would be absolutely impossible to foresee these catastrophic events, however, proper investing strategy implies being prepared for the infrequent.  Many pension programs, dividend funds, and other investment vehicles were heavily invested in BP for its huge dividends.  Now, some weeks later after reaching $60 a share, it is down in the mid-$40 per share region.

Reallocating Risk

After the last month, investors need to step back, take a look at what they own, and find the worst case scenario for each.  Though conventional wisdom has told us that buying different asset allocations creates enough diversification for our portfolios, the last year has told us differently.  From billion-dollar oil spills to financial catastrophes and limited electricity, the markets aren’t always what they seem.

Photo Credit: New York Times

While the rest of the world is tuning into the incredible decline in European equities and debt, emerging markets may be the largest benefactor.  Enabled with low debt to GDP ratios, strong export economies, and nowhere to go but up, emerging markets are now relatively strong against what were once considered the unsinkable economies.

Insurance Screams Sell

The cost of insuring against default, a popular indication of what is often to come, has exploded in Europe.  The cost of insuring European government debt against a default has nearly doubled this year alone from 59 basis points to 129 after breaching a record high of 167 at the height of the panic.

For each basis point, investors must spend $1000 to insure $1 million investments against default.  Therefore, for the record, to insure $1 million of European debt, investors would have to spend $16,700 per year.  The costs practically erode any benefit of investing in European debt, and the trend implies European stocks may be even weaker than thought.

Relative Value

Relative to other parts of the world, Europe isn’t nearly the investment it is purported to be.  Nations like Greece, Portugal and Spain, all plagued with debt and financing woes, are now considered to be riskier than developing, and politically unstable, Russia, Thailand and the Philippines.  Such a huge disconnect shows that investors want nothing to do with Europe, and they are more willing to invest and insure typically unstable nations than they are developed nations with larger debt loads.

Build on BRICs

The BRIC nations, or Brazil, Russia, India and China, are quickly becoming the world’s safest investments.  The four countries, each with impressive foreign currency reserves rather than debt, are better capitalized than most developed countries, and they have the fundamentals to project that future earnings will be equally strong.

Correlation is Key

The question going forward is whether or not the emerging markets will be depressed by general discontent with the equity markets as a whole.  With global trade virtually ensuring mutually assured economic destruction should a major power succumb to debt, the question is whether the emerging markets of today can build on a strong, internal consumption economy.

Photo Credit: Retuers

In order to reduce the chance of another large dip in US stocks, the SEC will be testing new rules to govern trading first on S&P 500 stocks.  The new rules, slated to go in place until December 10, will suspend trading in any S&P500 stock that rises or falls more than 10% in any five minute period.  After the 10% dip, the individual stock will cease trading for five minutes.

Circuit Breaker Goals

The SEC hopes that by creating circuit breakers, the stock markets will react more rationally during sell-offs.  By pausing for five minutes after a 10% plunge, traders will be forced to sit on positions, without an ability to sell.

In addition, the circuit breakers prevent runaway losses due to stop loss market orders.  Contrary to popular belief, stop loss orders, which investors set to exit a position when it falls below a certain price, are actually market orders, not limit orders.  As we saw in the 1000 point plunge in the Dow a few weeks ago, stop loss orders can send the market into freefall, as more stocks come up for sale as prices plunge.  The rules would also restrict upward movements of greater than 10%.

How Will the Circuit Breakers Work?

The circuit breaker system will only work between 9:45 and 3:35, allowing for large changes in price at open to reflect overnight developments, and the system will cease before market close to not restrict investors from cashing out of a position before the day ends.  This is important for day traders and swing traders, who usually rely on leverage and are charged carry fees on the margin if positions are held overnight.

Rules Expansion

The SEC will look to expand the rules to more individual stocks and ETFs “as soon as practical,” hoping to curb rapid selling or buying sprees spawned by electronic trading on all stocks.

In addition, although not mentioned in the recent release, analysts expect a similar macro circuit breaker to be applied to general indexes.  Whether or not the rules will stick is still up for debate.  A ten-day session will soon be held to discuss the effects of the circuit breaker system on the stock markets.

Photo Credit: BBC

The fear of an economic recession is already priced into the Shanghai index.  After breaching a previous low to hit its lowest point in 2010, the Shanghai index shows it may be pricing in far too much fear and not enough future upside.

Fundamentals are Improving

Despite concerns over a property market that has surged 12% year over year, the main driver of Chinese growth is starting to come back.  In April, Chinese export data showed that exports are increasing at a faster than anticipated rate of 30.5%.  In addition, a new line of credit given to bankrupt nations in Europe ensures that one of its main export markets will be well capitalized enough to continue borrowing its wares.

Relative Value

The last time the Shanghai index traded to its present low was when it moved through the level in early 2007.  Of course, that was before the bubbling indices overseas started to fall and the economy slipped into economic recession.  However, with China being the most resilient to recession, falling only when the economy started taking a toll on China’s export economy, improving leading indicators in Europe and North America suggest China could rebound, albeit lagging the rest of the world since inventories are still higher than normal.

Technically, the current market levels also play a role.  The 2660 level was seen as strong support in February 2007, and the index bounced again in July 2008 before falling through a month later and bouncing back through in April 2009.  Afterwards in late August and early September, the index bounced off the level again, suggesting there are plenty of buyers at today’s price levels.

Pulling the Trigger

Investors would be well advised to continue building a position in China’s largest index, seeing plenty of opportunities for gains and limited downside.  Since China was the last to enter a recession thanks to its reliance on foreign orders, it is only natural that it will be the last to exit recession.  However, with the fundamentals now turning in favor of China’s exports, investors have an opportunity to profit heavily on deeply discounted foreign equities.

Photo Credit: Nicholson Cartoons

Though investors may love dividends for their income potential, stocks that issue dividends to investors also fair better in weaker markets.

What’s In a Dividend?

Dividend paying stocks are more than just income producers; they’re also wealth protectors.  Because dividend stocks pay out a dividend regardless of the performance of their stock price, they’re very much protected to the downside.  Consider the idea that fixed income investors can reroute investments to high yielding dividend stocks when the yields become attractive.  As such, dividend stocks are less likely to dip in price when the yield coincides with yields on corporate debt.  Higher yields mean a smaller chance a stock is going to zero.  Wouldn’t we all invest $10 for a stock yielding $.75, especially one that is financially sound?  Of course we would!

Dividends Over Bonds

Triple A rated firms may offer higher yields to holders of their corporate debt, but be wary of the downsides.  With rates at their lowest in history, the chance that interest rates will rise is almost a certainty.  When rates rise, the value of bonds dip, exposing investors to a paper loss until maturity, when the full face value of the bond is paid to investors.

Dividend stocks, on the other hand, do not have such certain downside, and for investors with less time on their hands, they present a very attractive opportunity.

The bottom line is that dividend stocks have a potential to the upside and minimal downside possibilities, while bonds are almost certainly headed to the downside in the foreseeable future.  With that in mind, it makes perfect sense to start allocating more of your fixed income allotment into stocks, but not just any stock: only high yielding dividend stocks.

Be Smart About Your Selection

If you’re nearing retirement, it makes little sense to start shifting large sums of capital out of fixed income and into dividend stocks.  Since there is generally more volatility and risk in stocks compared to fixed income, it would be best to stay where you are.

However, those with long term horizons have plenty of extra flexibility by proper employment of high yield stocks within a retirement portfolio.  For twenty and thirty year olds, ditch the debt and buy stocks; you’ll have plenty of time to make up the difference should losses occur.  However, with dividends as rewarding as they are now, you can even afford some capital depreciation.

Photo Credit: The Sun

Attempts have been made to connect China’s surging real estate market to that of the bubble in the United States from 2002-2007.  Although the surging prices do appear to be similar, there is a critical disconnect in the correlation: China has capital.

Stocks and Homes

Tightened monetary policy in the mainland has crushed Chinese stocks for the time being.  Investors are concerned that without easy money policies, the rally could be halted, with the economy failing to find enough investment capital to keep moving.  This thought is centered on fallacy, however, considering the extremely high savings rate of Chinese citizens and robust foreign trade which brings in billions of dollars each year.

In addition, attempts to put a stranglehold around the housing market will eventually prove to be unproductive.  Currently, investors seeking to buy investment properties must put up 50% of the sale price and can finance the remainder.  Believe it or not, that 50% requirement is actually up from 40%, the same amount in which the “bubble” came to be.

Monetary Policy Ineffective

Economists know that monetary policy in a country with double digit savings rates, an annual multi-billion dollar positive trade balance, and large capital requirements for real estate investment is ineffective.  Since investors are required to put up half of the cost for new developments or investment real estate, only a fraction of the cost is borrowed.

Clearly, Chinese real estate investors are already independently wealthy, since their opportunities for profit are actually quite low.  A home yielding a modest 8% per year in rents generates only 16% when leveraged with 50% down.  Compared to the United States, when at the height of the bubble, homes were sold with 2-3% down and yields were in the triple digits, there really is no comparison.

Growth in Personal Wealth

The biggest contrast in the real estate markets in China and in the United States is the amount of personal wealth per capita.  Though savings rates in China have come down in recent years, the middle class continues to grow, and as that middle class (future homeowners) has enough wealth to purchase a home, they will do so.  The growth in China could be best equated to a reverse baby boomer era.  While more and more people in the United States are retiring, and assuming lower standards of living, China’s new middle class is just emerging.  With that emergence of the middle class, there will be even a further strain on finite resources, particularly real estate.

Photo Credit: Swift Economics

New regulation attempts on the derivatives market could threaten the earnings of insurance companies and add new strain to the corporate debt markets.  A move by US legislators to de-leverage the derivatives exchange could bring about incredibly expensive margin calls.

The Basis of Regulation

A financial reform bill moving throughout Congress has one simple goal: to reduce the reliance on the derivatives market, as well as reduce the total amount being traded between investment banks, insurers and other institutions.  The new bill would require higher margin requirements for both parties in a derivatives bet, both for bets already made and for future bets between two parties.

Why the Regulation Matters

The derivatives market is perhaps the most leveraged market on the face of the earth, with most bets made with just 1-2% of the stake put up as collateral.  When one bank and another make a wager for $50 million in the future, only one party would put up $1 million as collateral, or a premium, to maintain the bet.  This allows for systematic leveraging throughout the entire exchange that has exploded the total value of all derivatives to an estimated $100-$500 trillion.  This figure is multiples above the total output of the entire world in just one year.

What the Bill Would Do

As mentioned previously, the goal of the bill is to reduce the overall size and scope of the derivatives market by requiring higher margin requirements.  The requirements would rise with the size of the individual banking institution, based on the amount of risk each bank poses to the financial system at large.

However, politicians have yet to consider how much new collateral would be needed should these bills pass.  If we assume that derivatives are worth a total of $100 trillion, and Congress mandates a new 10% margin requirement, $10 trillion will need be raised from the debt markets to continue trading.  This amount is just a fraction of the derivatives market, but some 70% of the total economic production of the United States in just one year.

Thus, should this bill pass and new requirements fall into place, insurers, bankers, and gamblers alike will have to pony up trillions to meet new laws.  Where will this money come from?  No one yet knows.

Photo Credit: ThinkQuest

As a nation, China’s consumption of coal continues to explode, thanks to a new stimulus package that gears the nation’s production towards infrastructure development, a relative sinkhole for energy.

Chinese Coal Consumption

Just seven years ago, China exported approximately 94 million tons of coal and imported around 10 million tons.  Fast forwards to 2009, and China exported 20 million tons and imported more than 125 tons of coal to fuel its infrastructure economy.

The trend has yet to show any signs of slowdown.  In March, China’s coal imports were up 165% from March 2009, a year when their imports were already up about 250% over the year prior.   Total imports in the first quarter of 2010 were up 225% from the year ago quarter.

To put it simply, a bet on coal is a bet on China, with the two so interdependent on each other.

Why China Needs Coal

70% of all electricity produced in China is a product of coal, even more so this year than in years prior because droughts have brought about a slowdown in hydroelectric power.  The drop in alternative energy couldn’t be any timelier, with both a construction and infrastructure boom demanding more from fragile electricity producers.  Expectations for electricity consumption continue to grow, with 10% more capacity coming on board in 2010, most of which will be derived from coal-burning plants.

The Futures Look Bright

Despite a global decrease in energy consumption, coal futures have priced in even more gains from the coal industry.  Coal from Newcastle Australia is becoming the most expensive, as it is broadly considered to be the price-setter for Asian energy consumption.  Investors have an excellent opportunity to invest not only in today’s higher coal prices, but also those of the future, with future prices out four years as much as 20% higher than current prices on the world exchanges.

A Double Edged Opportunity

A catastrophe at Massey Energy sent the leading coal ETF, Market Vectors Coal ETF (KOL), to topple some 7% on litigation fears.  However, with Asian consumption booming, investors looking for indirect access to China should look no further than coal.  There really is no better investment than one that is selling at a discount to today’s earnings, with higher earnings already priced into the future commodity prices.

Photo Credit: Reuters

Concerns over a contagion in the nations of Greece and Spain have plenty of support.  However, it isn’t debt owners that should be concerned, but the economy of any nation currently using the Euro.

Why the Euro is Weak

The greatest concerns centering on Greece and Spain’s debt troubles come from the European Central Bank, an agency tasked with the job of setting monetary policy.  Although central banks play a vital function in the economic climate of any nation, the European economic alliance is being tested by a central bank that cannot work positively for all nations.  Calls for the ECB to begin quantitative easing to absorb the debt woes of two nations have been met with concerns from other developed economies in the region.

An Independent Central Bank

It is of little consequence to Canada or Mexico when the United States begins quantitative easing.  However, for Greece and Spain to be benefactors of quantitative easing, the euro would have to be inflated, and the 22 countries currently using the euro would be negatively affected by any policy changes meant to positively affect the economic conditions in both Greece and Spain.

Don’t Bet on Easing

The European central bank is perhaps one of the stingiest of all.  The ECB was one of the last to lower rates ahead of the global financial crisis and has yet to drop its rate it charges consumer banks to nearly the same degree as its western counterparts.

Also affecting the ECB are political ramifications.  The ECB is prohibited by its own mandate to quantitatively ease the credit markets, and individual purchases of Greek and Spanish bonds could risk a political uprising.

However, the debt markets are in crisis, the euro is in free fall, and the IMF’s attempt to bail out the failing Greek economy has yet to show much progress.  Investors should expect further reliance on an international bailout for both nations, though it will do little to solve the problem.  IMF loans are historically ineffective, and they often leave a nation to continue the same destructive policies that set off the crisis in the first place.

If you’re looking to invest overseas, avoid Europe as a whole, as every nation, bankrupt or solvent, is prone to the impact of a limited central banking authority.

Photo Credit: Nation Multimedia

Investors looking for better returns or terrified with the growing US debt have seemingly abandoned government paper.  So much capital has left government bonds that several triple-A corporations offer lower bond yields than the government that taxes them.

Government Debt Loses Steam

Although Treasuries emerged as the global safe haven after the financial crisis of 2008, investors are now more willing to take risks with Berkshire Hathaway and Johnson & Johnson than the US government.  In recent weeks, Proctor and Gamble, Lowe’s and Abbott Laboratories have presented lower yielding paper than government debt with the same maturity, signaling investors are more willing to bet on the solvency of any number of AAA-rated firms than that of the US government.

Moody’s Stern Warning

After the 2010 Federal deficit soared above 10% for the first time in decades, Moody’s issued a stern warning, asserting that the rating agency could not justify giving the United States a top rating if record deficits were to continue.  By 2013, a full 13% of the US tax revenues will be used exclusively to pay interest costs on the national debt, an amount that Moody’s considers unreasonable for an AAA-rated government.

Your Best Bet is Corporate

Corporate debt may be the best bet for investors after all.  Many firms backed off aggressive debt sales during the financial crisis, but have since found their way back to the market to finance mergers and acquisitions and growth strategies.

As investors grow wary of government bonds, largely due to their low reward interest rates, corporate debt is very appetizing thanks to its low risk profile and potential to appreciate.  Foreign corporate debt should be even more appealing to investors, as it provides solid returns with low risk and exposure to other currencies, which will appreciate as the US government solves its looming fiscal crisis.

Remember the Sharpe Ratio

The bond market is full of low debt, high (and improving) income corporations that offer better income to debt ratios than many triple-A would governments.  Those looking for reasonable returns and low risk may find it better to buy corporate debt as a substitute for government debt.

However, remember, as always, the government does have the right to tax firms into oblivion.  Therefore, no matter how safe corporate debt may be, the government is just one step ahead of the game when it comes to generating revenue.

After Obama’s health care plan was signed into law, a number of companies have stepped forward to assert that their earnings may take a dip due to new taxes and requirements on their health care programs.  Although the charges will be on the books for just one year (afterwards companies will account for the higher costs), some companies could come up short in 2010.

Names to Watch

Among those that will face higher expenses this year are all-American companies like John Deere and Caterpillar, which stand to charge off $100 and $150 million respectively due to a new tax on government subsidies.  The subsidy, which helps carry some of the burden of the high cost of prescription drugs for seniors, will affect a number of firms.  Boeing, Con-Way, Navistar, Exelon, Verizon, Xerox, Met Life and Public Service Enterprise Group all came public with new expenses in an open letter before Congress’ important vote.

An Accounting Game

The new tax, which will not go into effect until 2011, will charge 2010 earnings for most of the above companies.  John Deere, for example, will take the $150 million charge in the second quarter and advised that its earnings forecast of $1.3 billion in 2010 did not include the cost.  Despite going public about the costs, investors could be caught off guard when 2Q earnings are released with the full burden of one year’s taxes accounted in just one fiscal quarter.

Playing it Safe

A number of companies from small businesses to international conglomerates will have a costly new tax on their books, and many will account for the new costs at differing times.  Although many have made their accounting timetable public, several firms have yet to advise their shareholders for the costs – which could impact stock prices as the healthcare cost makes its way on the books.  Investors with a long term horizon have nothing to worry about, though shorter term investors and those with significant holdings in subsidized firms would be well-advised to look for company guidance regarding these one-time charges.

Photo Credit: The Economist

Although 2009 was loaded with recovery green shoots, mostly in battered industries such as finance and retail, investors are best to be diversified during the later stages of recovery.

Green Shoots Give Way to Forests

When green shoots give way to forests, stocks that lagged the market during the bull run typically move with momentum, rising higher and quicker than the pre-recovery superstars.  Much of the differential comes from individual industries.  For example, banks flourished as rates plummeted during the recession and their margins increased.  On the other hand, luxury goods makers and durable goods producers rallied, though not to the same degree as the greatest driver of demand: consumers, who still find themselves jobless.

Common Sense?

Although this may seem as common sense investing advice, fund managers are often quick to ignore it.  Many funds listed as “large cap value” mutual funds ultimately take on positions outside the namesake of the fund, choosing to follow the quick and easy returns of advancing industries with complete disregard to their main agenda.  Fund managers, like any other employee or contractor, know that the success of their fund often relies on year to year returns, which help bolster marketable 3-5 year returns.

Playing it Smart

It is no secret that the fund industry has its flaws, especially when it comes to playing Wall Street by the book.  In these uncertain times, investors are best leaving their retirement funds in their own hands with exchange-traded funds rather than mutual funds.  ETFs are less costly, and investors know exactly what it is that they’re buying.  Unlike mutual funds which publish holdings quarterly, ETF holdings are published daily for the public to see.

Picking the Best

In moving forward, diversified portfolios are historically better positioned for recovery as hot sectors wane and new markets open up.  One of the best, and most diversified investments is an ETF none other than Vanguard Total Stock Market VIPERs (VTI), which tracks the total stock market and offers an unbelievably low annual expense of .07%.  A similar mutual fund may cost 5-10 times more yet provide little, if any, benefit to buy and hold investors.

Though down and out following the collapse of the bubble in 2007, real estate could be back in vogue as an investment.  Lower prices, lower interest rates and an improving economic climate could set the stage for another great boom in real estate investing.

Real Estate as an Investment in 2010

Anyone who has watched the evening news in the past six months knows there’s no shortage of “fixer-uppers” and under-priced repossessed homes on the market.  As the recession wears on, more and more homeowners are underwater, and many are walking away from the homes into which they’ve invested so much.  For investors, there has never been a better time to buy.

Low Rates

The cost of borrowing is one of many great reasons to be a landlord.  With rates under 5% for prime borrowers, monthly payments on investment grade houses are well below monthly rent prices.  In addition, a new slew of previous homeowners who are now renters need a place to live, and with banks unwilling to make another risky loan, they’ll turn to the rental market for inexpensive housing.

Follow the Jobs

Should the employment situation improve in the coming months, the rental market will be quick to follow.  As more people find full-time and even part time employment, demand for the basics of life, which is primarily shelter, will grow faster than the general economy.  In many places, especially on the west coast of the United States, single family homes now shelter multiple families as unemployment swells well into the double digits.

If You Don’t Want to Be a Landlord

You don’t have to be a landlord to take advantage of rising real estate prices.  Real estate investment trusts, homebuilder stocks, and a variety of exchange-traded funds are sure to increase in price as the real estate economy rebounds.  One popular choice, the SPDR S&P Homebuilders ETF (XHB) has nearly doubled in the past 12 months, and it pays a healthy 1% annual dividend to investors.  Other opportunities in individual companies, such as Equity One (EQY), which rents office space and retail fronts to small businesses, provide another outlet into an already improving industry.  In the end, the opportunities are many, and the chance for profit is huge should the economy recover.

Following the release of $585 billion into infrastructure investments, China’s economy has bounced back quicker and with more force than any other economy in the world.  However, with so much capital flooding the infrastructure sector and trickling into many others, inflation remains a consistent threat.

The Origin of Inflation

Much of the record high inflation numbers involves the impact of the stimulus and a continuously strong export economy, which brings in billions of dollars each and every month.  Though the Chinese government has been a long time saver, last year it decided to cease its savings and instead invest $585 billion or 12% of the GDP back into the economy.

Naturally, inflation has followed, as the amount of money coming into the country each month is spiraling back through the economy, and the banking system continues to leverage it upwards through fractional reserve banking.

Solutions Could Be the Problem

Consumer prices in mainland China continue to rise, even as the government is pushing banks to curtail lending.  Developers must now put up a 50% down payment on real estate, crushing any opportunity at a bubble and restricting lending and money supply growth.

However, spenders aren’t deterred by higher down payments, and capital is instead flowing into consumer goods and personal items, which are now inflating in price at the highest rate since China’s recession ended.  CPI calculations excluding factory prices are recording growth two-times that of regular CPI calculations.

The Safest Place in China

Photo Credit: Canada.com

For now at least, the safest investment place in China appears to be the infrastructure sector.  However, once the stimulus cash is removed from the system and projects come to a close, the economic outlook could shift quickly and violently back into recession.

Although the fundamentals of the export economy are just has healthy as they were pre-recession, they’re dwarfed by stimulus measures and make up only a portion of the current economic explosion.

Investors should be careful when approaching Chinese investments, as eventually the stimulus will pass, and a small, but still significant, recession could take hold until the cheap and easy credit is dispersed through the economy.

Please understand that this article is about more than safeguarding your money; it’s about saving you headache and heartache. It’s about giving you peace of mind.

Before I explain, please allow me to ask a few questions:

• Have you given much thought about the money in your banking accounts lately? Do you know if it’s safe?
• Have you thought about what might happen if your bank fails?
• Did you know you could be left in the lurch for days, weeks, even months before you get your money back from the FDIC?
• What happens if the FDIC can’t cover your funds?
• How do you find a safe bank to protect your deposits right now?

I hope you’ve given these questions some serious thought.

I have to be honest: These questions were about the farthest things from my mind until about a year ago, when I downloaded the free “Safe Banks” report from my colleagues at Elliott Wave International. At first, the report scared me: I thought, “Oh My Gosh! I could lose all of my money if my bank fails. What would I do?”

But as I read on, I figured out that the report was not only about making my money safe; it was about giving me peace of mind.

If you’ve read any of the following news items, perhaps you understand the fear of learning your money might not be safe. Here’s a recent story from Bloomberg:

Sept. 24 (Bloomberg) — In May, the FDIC said it was projecting $70 billion of losses during the next five years due to bank failures. The agency said it expects most of those collapses to occur in 2009 and 2010.

The FDIC’s problem is that it didn’t collect enough revenue over the years to cover today’s losses. The blame lies partly with Congress. Until the law was changed in 2006, the FDIC was barred from charging premiums to banks that it classified as well-capitalized and well-managed. Consequently, the vast majority of banks weren’t paying anything for deposit insurance.

Of course, we now know it means nothing when the FDIC or any other regulator labels a bank “well-capitalized.” Most banks that failed during this crisis were considered well-capitalized just before their failure.

By the end of 2009, more than 130 banks will have failed. Most depositors will have little clue their bank was even at risk. Worse yet, the string-pullers in Washington are doing everything in their power to hide information about the safety of your bank from you.

So far, the FDIC has had enough money to cover insured depositors. But that money is quickly running out.

Just last week, the FDIC voted to mandate early payment of insurance premiums to help cover at-risk banks. But only time will tell if this move will provide the funds needed in the years ahead. Here’s what the Associated Press reported on Thursday, Nov. 12:

WASHINGTON (AP) — U.S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.

The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.

Worse yet, three more banks failed the very next day, Friday, Nov. 13.

This is a very real problem and a direct threat to your money. It’s more important now than ever to personally ensure the safety of your bank. The free 10-page “Safe Banks” report can help. It includes the very latest bank safety ratings from the third quarter of 2009 to help you prepare for what’s still to come this year and next.

Inside the revealing free report, you’ll discover:

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[Editor's Note: Gary Grimes focuses on mass psychology, U.S. stocks and the U.S. economy. Gary has a bachelor’s degree in journalism from Auburn University in Auburn, AL, where he was first turned on to the Austrian School of economics by way of the world-famous Mises Institute. His study of classical liberalism eventually led him to discover the Elliott Wave Principle and Robert Prechter’s theory of socionomics.]

When investors think of “risk aversion,” typically treasury bonds, corporate bonds and municipal debt rank highly on the list.  In today’s economic climate, however, it appears there may be more risk in low yielding debt than there is in stocks themselves, which are generally considered to be the most risky.

The Flee to Bonds

With deflation concerns brewing through the markets during the credit crunch, investors fled to cash, fixed income and other investments to protect themselves from dips in the market.  A deflationary environment would make cash more valuable as the market hemorrhaged leverage from itself, decreasing the overall wealth of the world.

Bonds would make an even better investment, investors believed, because not only would investors be protected from deflation, but they would also earn a return on their purchases.  With so much cash entering the bond market in what was a matter of days, bond prices skyrocketed and yields plummeted, as investors were willing to accept the smallest of returns just to have a safe “store of value” for their cash.

Bonds Could Be the Next Popped Bubble

After posting gains of more than 50% since March, the lowly yields offered on most corporate and government bonds appear more like a rounding error than a return.  As investors shift in sentiment from protecting their wealth to growing their wealth, stock prices will soar as bonds lag the market.

Interest Rate Hikes Coming Soon

Investors should pay very close attention to the Federal Reserve when trying to time the great bond exodus.  Currently, the Federal Reserve is keeping the overnight low at its lowest point in history, 0-.25%.  However, many analysts are expecting that in the first or second quarter of 2010, the Fed could start raising rates to curb inflation and to briefly cut the money supply to pause future inflation.

Of course, the interest rate set by the Fed greatly impacts the price of bonds; as rates rise, bond prices move in the opposite direction to push yields higher.  This will be the breaking point.  Many corporate bonds are currently trading at a premium price, meaning the market price of the bond is more than the value of the actual bond.  This results from the opposite trading between price and yield, where investors drive the price up if they are willing to seek a smaller yield.

Short Term Losses, Long Term Stagnation

Bond prices have likely reached their peak.  Should an investor buy into a bond today, it is most likely that he or she will lock in the current yield of the bond and experience paper losses as bond prices move downward and yields move up.  It is important to note that you only get the yield and price that you buy, and should yields move up 2-3%, your investment would still be earning the same return, while the value of your bond would have dropped by the same 2-3%.

Playing it Safe

Luckily, bonds are as varied as stocks.  If you do plan to stay on the bond route, there are a few categories that may be better than others.  Treasury and state municipal debt should be last on the list, as these debt obligations were perceived to be the safest at the onset of the financial crisis and currently carry a higher than normal premium due to strong demand for the bonds.

Investment grade corporate debt is one of the better risk/reward bond categories, as the returns are tied to a company’s ability to repay the debt.  With so many disappointing earnings reports over the last year, corporate debt was perceived to be less safe than government debt – which means it carries a much smaller premium.

If you’re willing to accept more risk to avoid any substantial premium, junk debt investments are still carrying lofty returns, but come with the added risk of a weak credit risk.

An Alternative to Bonds

High dividend stocks remain a very competitive contender in the fixed income space.  Prices for stocks were slaughtered across the board in 2008, and many companies are still paying the same dividend despite falling equity prices.  If you wish to avoid the US in your investments, the exchange-traded fund WisdomTree DEFA Equity Income (DTH) yields more than 11% and has no exposure to any US stock.

Billions of dollars tumbled into absolute return funds in the wake of the financial downturn.  Although these funds may guarantee absolute returns, they’re more likely to under-perform.

The Basis of the Business

Unlike other mutual funds and even exchange-traded funds, an absolute return fund has more in common with insurance policies than it does investments.  The goal of the funds is to protect investor’s wealth while generating returns equal to the stock market in the good years.  The unfortunate reality is that these funds always under-perform solely due to their limited risk exposure.

Take a Look Under the Hood

Shopping for a good mutual fund is akin to purchasing a used car.  You must look for a solid frame and hope the innards are reliable enough to perform for the price you pay.

However, when you open up an absolute return fund, you may be shocked how they invest.  Often, these funds are invested largely in annuities, corporate bonds and treasuries, which help maintain their value, while just a few percentage points of the fund have any exposure to risk.  Frequently, half or more of the fund will earn 5% in debt obligations, while the rest yields results equal to the stock market.  Assuming a 60/40 mix of bonds and stocks, the aforementioned portfolio would yield about 7% when the stock market is up 10%.  This is not a bad return, but absolute return funds are often the most expensive investments, costing as much as 2% per year.  Take that fee right off the top for earnings of 5%.  A corporate bond portfolio can beat that return!

Make Your Own Absolute Return Fund

With some basic math and an options account, virtually every investor can make his or her own absolute return fund that will actually perform as it should, without all the fees and expenses.

The first step in creating your own absolute return fund is to invest your portfolio, minus what you expect to earn per year in fixed income into a bond fund.  In this case, corporate bond yields are about 5% per year, and thus, you would invest 95% of your capital into said bond fund.  Your next step is to take the other 5% and invest it directly in stock options for your favorite indexing ETF.  Many people prefer to use the SP500 SPDR (SPY).

Picking the Right Option

Ideally, you’ll want to buy an option contract that is well in the money and at least one year from the start date.  In this case, September 2010 contracts work perfectly.  The stock currently trades at $107, and call options with a strike price of $100 are currently selling for $14, a 7% premium over true value.  Normally, spreads are much lower; however, recently volatile markets have made option premiums more expensive.  (The VIX index, which is calculated solely on option premiums, is currently at 23, which is normal for 2008, but much higher than the 10 point level set in 2007).

Let’s Do the Math

Let’s see how this model portfolio would respond if the stock market dipped 10%, stayed flat, or rose by 20%.

If the stock market fell by 10%, our options would be worth nothing, while our bonds would perform by 5% per year to keep us at breakeven.

Should the stock market stay flat, our bonds would earn 5%, while our options would have lost half their value (due to the premium).   In this case, we would earn 5% from the bonds and an adjusted -2.5% from the bonds for a total return of 2.5%.  (We beat the stock market here.)

Should the stock market rise by 20%, our bonds would yield 5%, while the options would have doubled.  The net result would have been a 10% return.
The Math Doesn’t Lie

Absolute return portfolios are well ahead of the market in the bad times, but far behind the market in the good times.  For someone seeking to grow wealth rather than merely keep up with inflation, absolute return funds simply aren’t ideal.  They’re too slow to grow and only serve a practical purpose when trying to squeeze the most out of a fixed income portfolio.  If you do opt for an absolute return strategy, make your own portfolio of stocks and bonds, saving yourself the hefty fees and producing nearly the same results.

Commodities and equities are very different investment vehicles.  One represents ownership in a company or business, while another represents ownership in one of the most basic units of production.  While they aren’t interchangeable, commodities typically lead any stock market rebound.

The Basis for Correcting Recessions

The Federal Reserve and Congress both spend significant amounts of energy and money to correct slowdowns in the economy.  The idea behind this blatant Keynesian think-tank is that when the private sector slows, the economy can be grown through the public sector.  Often, the solution is the expansion of the monetary base, easier credit, and direct infusions of cash through Congress to the American people.  Inflationary policies help lift important economic indicators, including the Gross Domestic Product, Consumer Spending, and Consumer Credit, among others.

Expansion of the Monetary Base

Never in history has the federal government and its government sponsored entities done so much to stop an ailing economy.  The Federal Reserve, trying to undo the lack of credit in the credit markets, increased the monetary base by nearly 100%!  In doing so, it has allowed the aggregate money supply to double from $5 trillion to $10 trillion.  But first, it needs borrowers.

Commodities Indicate Borrowing

Investors often look to commodities and price changes as an inflationary or deflationary indicator.  During the credit expansion of the housing boom, commodities, namely oil and gold, soared in value as the amount of dollars grew.  Through the banking system, and the ever increasing housing prices, the monetary base (the same one that has been doubled this year) was leveraged up to 10 times.

Oil and gold, in contrast, rose at rates far advancing the reported inflation, but right in line with the growth in money supply.  The case can also be made for the boom in stock prices during the 1990s.  From 1990 to 2000, the money supply grew by more than 1000%, and the stock market followed suit.

Trying to Tip the Scale without Breaking the Bank

Ultimately, monetary policy has two goals: holding the reigns tight during economic expansion and letting them loose during slowdowns.  In the most recent case, the Federal Reserve has a job to expand the money supply while being able to cut it back as the recovery arrives.  Should the Fed fail to time either movement correctly, the resulting chaos could be drastic.  On one side, if the reigns are not brought back quickly enough, it will create an inflationary environment where businesses are not able to make long term deals.  One the other side, cutting back too quickly could send the economy into a death spiral, known better as a double dip recession.

Why Commodities Matter

Commodities are not only a measure of inflation, but also a measure of economic activity.  Economists often view oil and coal supply as a means to measure manufacturing and transportation strength.  In the same way, heating oil and natural gas often signal how many people are cutting back the thermostat to save money.  In accurately assessing the state of the economy and market, commodities will be extremely important to stock traders, who use commodities to judge the future strength of equities.

Correlations Count

During the 2004-2007 stock market run, oil preceded stock’s bullish run.  Nearly every day, commodities moved upwards, followed by stocks, and often by several full percentage points.  As oil neared its peak, however, the stock market began to lose value, mostly due to the economic consequences of $147 per barrel oil.

Inflation, at This Point, is Desired

Inflation is the ultimate goal of today’s monetary policy.  Last fall, all eyes were on deflation and its impact on business.  When the money supply shrinks or stagnates, long term debt obligations are more difficult to fulfill, largely in part to a limited amount of dollars chasing the same debt.  No matter how many dollars are in circulation, contractual obligations still apply in the dollar terms noted in the agreement.  For example, should Company A agree to a contract with Company B for $1 million in five years, a 50% reduction in the money supply would mean that $1 million is worth $2 million in today’s terms.

Looking Forward

The deflationary environment that scared investors into fixed income will reverse when commodities and inflation begin returning to the global stage.  At that point, the run for commodities, hard assets, and even equities will be so powerful that it will jumpstart the marketplace.  The inflation is there, but first the economic fundamentals must support it.  When jobs come back, expect financing of household goods and even homes to continue, and at that point, the markets should well outperform.