How The Oxford Club Beat The Financial Crisis… And What We See Now

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, September 23, 2010: Issue #1351

Investment forecasting is an inherently humbling business.

No matter how many good calls you make, there is always the possibility of getting it wrong the next time. Unexpected events happen. Markets turn on a dime. And an investment advisor often learns – in the cold reality of hindsight – that just when he felt like sticking his chest out he should have been covering his privates instead.

Yet there is a time for celebration too. And there is no denying that The Oxford Club and its members just came through the biggest financial crisis and the nastiest economic downturn in modern history with flying colors.

Perhaps the most surprising part is this: We can’t claim we foresaw how it would all unfold. If we had, we might have told readers to plow their money into bonds before the stock market meltdown and then switch back into stocks at the very bottom.

Unfortunately, there’s only one type of investor who does this consistently. You may have heard of them. They’re called liars.

So how did we succeed when tens of millions of investors stumbled?

Guesswork, Forecasting, Market Timing: Three Things You DON’T Need to Invest Successfully

Our investment system is built on the fundamental premise that to a large extent, the future is unknowable. Seasoned investors agree but then insist, “But of course you have to guess.”

No, you don’t.

We’ve taken the guesswork out of investing. For long-term investors, we use a proprietary asset allocation model, rebalance annually and keep taxes and investment costs to the absolute minimum.

No economic forecasting or market timing required.

Our short-term traders focus on buying great companies that are likely to beat consensus earnings estimates by a wide margin and run trailing stops behind them to protect both their principal and their profits.

How has this worked? You be the judge…

How We Notched a 28% Average Return Amid the Chaos of 2008

2008 was one of the worst years on record for the S&P 500. It posted a return of -38.5%. That caused us to stop out of 45 stocks in our Oxford Trading Portfolio. Here is the entire list. Nothing has been omitted. Although we took some lumps like everyone else that year, the average return on our closed positions was 28.6%.

With the financial crisis unfolding, we set aside our market neutral position. Why? Because you shouldn’t be afraid to aggressively buy or sell when market sentiment and valuations reach extremes. (That means either extreme optimism and sky-high valuations or extreme pessimism and rock-bottom valuations.)

Going into 2009, most investors were scared out of their pants. Stock market players were cashing in their chips. Bank depositors were running down to their local branch to withdraw their savings. The world seemed on the edge of financial collapse. And so did the markets.

Yet the headline on our annual forecast issue was: “Our No. 1 Prediction for 2009: Economic Disaster AND a Soaring Stock Market.”

Bear in mind, almost no one was saying this at the time. But that’s exactly what investors got. While the economic slump only deepened in 2009, the S&P 500 came roaring back – and our recommended stocks outperformed it handily.

If the Market Gives You Lemons… Don’t Get Sour, Just Suck Up Profits

This year we’ve maintained our optimistic stance on equities and have been rewarded with even more big profits.

While the S&P is only up 4% year-to-date, we’ve already realized gains of 229% on La-Z-Boy (NYSE: LZB), 103% on Tiffany & Co. (NYSE: TIF) and 54.7% on Emergency Medical Services (NYSE: EMS).

We’re also sitting on current gains of 321% on the Vanguard Emerging Markets Index (VEIEX), 299% on the Templeton Dragon Fund (NYSE: TDF) and 94% in Discovery Communications (Nasdaq: DISCA).

Yet over the past year and a half, at investment conferences around the world, I’ve heard almost nothing but talk of stagnation, double-dip recession and gallons of gloom and doom.

This week the National Bureau of Economic Research reported that the longest and most severe recession since the Great Depression is over. That doesn’t mean we’re out of the woods yet. We’re likely to have high unemployment and low economic growth for many months – and perhaps the next three years.

But we’re fully prepared for that, too. In fact, we’re already capitalizing on it. Perhaps that’s why the independent Hulbert Financial Digest ranks our Oxford Club Communiqué among the top investment letters in the nation for 10-year performance.

In short, we’ve taken the lemons the market handed out during the financial crisis and turned it into a Tom Collins with a fruit slice and a maraschino cherry.

If this sounds a little brash, I apologize. But we’ve enjoyed enormous success during the toughest economic period in more than 80 years.

And as Dizzy Dean famously said: “It ain’t bragging if you can do it.”

And if you want to do it, too, consider joining The Oxford Club and we’ll show you exactly how in our five model portfolios.

Good investing,

Alexander Green

Business/Finance, Crisis, Economic crisis, Economics, Finance, financial crisis, Financial economics, Financial markets, Futures contract, New York Stock Exchange, Oxford Club, P/E ratio, Short, Stock market

Buying Tax-Free Bonds: Why You Need These Fixed-Income Investments Now

by Alexander Green, Chief Investment Strategist
Monday, September 20, 2010: Issue #1348

In the three weeks since I pointed out the bubble in the U.S. Treasury market, those securities have gotten walloped as yields have risen over one half of one percent.

I’ve received letters from many readers asking what they should do now with the fixed-income portion of their portfolios. For income investors, I have three answers…

• High-yield corporate bonds.
• Inflation-adjusted Treasuries (TIPS).
• Tax-free municipal bonds.

Especially tax-free bonds. Here’s why…

• They yield more than Treasuries.
• They’re exempt from federal income taxes (and state income taxes if you buy state-specific bonds).
• Your taxes will soon be going up. Way up.

Why Income Doesn’t Properly Reflect Real Wealth

I know, I know. Washington politicians promise they aren’t going to raise your taxes. They’re only going to raise them on the 2% of American households that make $250,000 or more.

Horse manure.

Having deliberately set up a fiscal crisis over the past decade, our elected misrepresentatives will soon be searching for ways to raise revenue to meet these obligations. The politically convenient idea is to raise taxes only on “America’s wealthiest.”

Yet earned income is often a poor indicator of wealth. Apple CEO Steve Jobs, Citigroup CEO Vikram Pandit, Google CEO Eric Schmidt, Yahoo! CEO Jerry Yang, Oracle CEO Larry Ellison and Berkshire Hathaway CEO Warren Buffett all receive annual salaries of $1.

Real wealth is determined by looking at a balance sheet not an income statement. The tax code is set up to punish high-income earners, many of whom are not rich but rather striving to become rich.

The problem with raising taxes on high earners is that this country badly needs to create jobs in the private sector. These top 2% – who already pay almost half of all income taxes, according to the Internal Revenue Service – are overwhelmingly small business owners. If the economy is going to grow, we want to encourage them to open new businesses and expand existing ones.

I know some economists claim that raising taxes doesn’t discourage risk-taking. Let’s put that theory to a simple test…

The Small Business Tax Roadblock

Imagine if someone offered you $50 to deliver an important document to a business located in the next town. Would you do it?

How about if he offered $40? How about $30? Or $20?

If you feel less inclined to accept each declining offer, congratulations. You’ve recognized that the more you pay in taxes – which is the same thing as being offered less money to do the same job – the less interested you are in doing the work.

Of course, small business owners are primarily wage payers, not wage earners. Take a moment and put yourself in their shoes. Imagine risking your hard-earned capital on a new business, fully aware that customers may complain that you charge too much… employees may believe you pay them too little… suppliers may claim you drive too hard a bargain… government officials may insist you aren’t complying with their mountain of regulations… and competitors, plain and simple, would like to drive you out of business.

Factor in the well-known fact that four out of five new businesses fail in the first five years. If you manage to meet these challenges and become profitable, the government – between federal income taxes, state income taxes, social security taxes, Medicare taxes and others – will take up to half of what you make. And some argue that higher taxes aren’t a disincentive to start or expand a business?

The Problem with Taxing the Top 2%

Of course, you can’t run a government without collecting taxes. But here’s the key. You increase revenue by expanding the tax base not increasing tax rates. (That means expanding the private sector, not the public one.)

You want to reward education, hard work and risk-taking. In short, you don’t raise up the wage earner by pulling down the wage payer.

Of course, many of our elected “leaders” have never held a job in the private sector, so – to them – this is all just the sheerest conjecture.

I hate to burst anyone’s bubble. But we won’t solve this nation’s fiscal crisis on the backs of the top 2% of income earners. Nor should we try.

Sure, it’s a political winner in some circles. But history shows that “soaking the rich” doesn’t work.

Which state has the biggest fiscal crisis in the United States? California.

Which state has the highest state income taxes? California. Other high-tax states are in a similar pickle.

And look at Greece. The country has a top marginal tax rate of 40%, plus a 23% value added tax (VAT), recently raised from 21%. Yet the country is a financial basket case. Why?

Because governments around the world are overreaching and politicians – ever intent on securing their re-election – are addicted to spending.

How to Beat the Washington Pick-Pockets

As Margaret Thatcher pointed out a couple decades ago, the problem with the social-welfare system is that eventually you run out of other people’s money.

With the current state of the economy, most politicians are reluctant to raise taxes. But history shows that they simply will not cut spending. (That includes Republicans. Witness the rise of the Tea Party movement.) Heck, they won’t even cut the growth of spending.

Needless to say, it’s only a matter of time before Washington turns its attention to your wallet. And that, in a nutshell, is why you ought to own high-quality tax-free bonds, even though the outlook for investment grade bonds is less than salutary.

You can mitigate the effects of any future rise in interest rates by owning individual bonds and keeping maturities relatively short.

Because your taxes will be going up. Not immediately, but before long. And that will make tax-free yields look even more compelling.

Don’t say we didn’t warn you.

Good investing,

Alexander Green

Business/Finance, Finance, Flat tax, Income tax in the United States, Political economy, Public economics, Social Security, Tax, Tax rate, Tax reform, Taxation in the United States, Value added tax

Are You Ready for The Evergreen Portfolio?

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, September 13, 2010: Issue #1343

Bill Gross, the top-performing manager of the Pimco Total Return Fund, the world’s largest actively managed mutual fund, says it’s time for investors to accept and start adjusting to “the new normal.”

What’s that?

High unemployment, excess housing capacity, difficult-to-obtain credit and, not least of all, much-lower-than-historic returns from stocks, bonds, real estate and cash.

Sounds depressing. However, some investment advisors aren’t content telling their clients to simply lower their expectations. Two of them are seasoned investors Martin Truax and Ron Miller, Managing Directors at Atlanta-based Morgan Keegan & Company.

Adjusting to the “New Normal” With The Evergreen Portfolio

Truax and Miller point out that “buy and hold” investing and simple diversification haven’t worked over the last 10 years – and it’s hard to disagree. The S&P 500, for example, is no higher than it was in 1999.

Looking forward, they argue that these failed approaches won’t work over the next 10 years either.

Yet there are proven strategies that are likely to produce high returns with an acceptable level of risk. In their new book, The Evergreen Portfolio, out this week from John Wiley & Sons, Truax and Miller invite more than a dozen of the nation’s leading analysts to talk about “the new normal” and make specific recommendations about what investors should do with their money today. (They also reveal their own particular solution: The Evergreen Portfolio itself.)

The book is chock full of interesting and unconventional investment angles. That’s not too surprising when you consider who was involved in this project.

The Evergreen Portfolio: A “Who’s Who” of the Investment World

Contributors to The Evergreen Portfolio include such well-known names as…

• Rick Rule, CEO of Global Resource Investments.
• Dr. Mark Skousen, free-market economist, former Investment U Chairman and current contributing editor, and editor of Forecasts & Strategies.
• Elliott Gue, editor of The Energy Strategist.
• Frank Trotter, currency specialist and president of EverBank.
• Mining specialist Bob Bishop, the longtime editor of Gold Mining Stock Report.
• Bob Prechter, editor of The Elliott Wave Theorist.
• Richard Maybury, publisher of U.S. and World Early Warning Report.

There are many others, including yours truly. (In the interest of full disclosure, I have not received – and will not receive – any compensation from the sale of this book.)

There is a lot of pessimism out there right now about what lies ahead for the economy and stock market. Yet, unlike most investment advisors, Truax and Miller don’t try to convince the reader otherwise. They are convinced that excess consumer debt, weakness in housing, and rampant government spending are creating a very tough environment for investors.

Their advice – and the investment advice of their contributors – is to face up to this new reality and start managing your portfolio effectively to deal with it.

Why You Need to Read The Evergreen Portfolio

The Evergreen Portfolio is written for:

• Investors who want a thorough understanding of “the new normal” and hard-hitting advice about how to protect your assets even in inflationary or deflationary times.
• Businesspeople and other professionals who have been successful in their careers but need a solid foundation for investment success.
• Investors who are unhappy with the performance of their brokers and money managers and want “untainted” investment advice.
• Investors who are overwhelmed with too many investment choices and want an uncomplicated approach to the market.

I’m a contributor to The Evergreen Portfolio, so perhaps I have a positive bias. But the book is the distilled wisdom of more than 15 seasoned investment pros and a thoroughly enjoyable read, full of unconventional ideas and unusual insights.

There will be fortunes made and lost in the months ahead – and, like most readers, I intend to be on the winning side. The Evergreen Portfolio is a survival guide for those who want to protect and build their wealth in the tumultuous years that almost certainly lie ahead.

Good investing,

Alexander Green

P.S. The Evergreen Portfolio is available at bookstores nationwide and is currently discounted 28% on Amazon. For further information on the book, click here.

Business/Finance, Diversification, Finance, Financial economics, Financial markets, Financial services, Funds, investment, Mutual fund, Portfolio

Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, September 7, 2010: Issue #1338

When the Dow bottomed near 6,500 in the thick of last year’s financial crisis, few investors thought it was a good time to buy stocks. Sentiment was overwhelmingly bearish.

So when the market bounced higher, the consensus was that it was a “dead-cat bounce,” a bear-market trap. But it wasn’t.

As the rally gained speed, investors began to think that perhaps the worst of the financial crisis was indeed over and they would buy some stocks on a retracement or when the market tested its lows.

But that didn’t happen either. In fact, the Dow didn’t tire until it crossed 11,000 in May. By then, the market was up over 70% in just 14 months.

That was pretty depressing to investors sitting on the sidelines, earning microscopic yields on their cash. Many were so busy licking their wounds from the sell-off that they made little or no new investments during the rebound.

So what should you do now?

Investing in Stocks: Follow the Earnings

Since the market high four months ago, the Dow has lurched back and forth. But the primary direction has been down. No surprise here. After a rally of this magnitude, a correction is not unusual.

But don’t be like last year’s investors and miss the next rally. Now is a good time to put money to work in high-quality stocks.

In fact, the market is almost as cheap today as it was during the depths of despair in March 2009.

How is that possible when the Dow is more than 3,500 points higher?

Because a stock or index price doesn’t tell you anything about valuation. What matters are earnings and the multiple that the market puts on them.

Three Reasons Why You Should Buy Stocks Today

When measured by profits, the market is almost as cheap today – at 14.9 times trailing earnings and 12.2 times prospective earnings – as it was in March last year.

That’s because earnings are up. Way up. Second quarter profits at U.S. companies hit an all-time record.

A year and a half ago – when investors should have been buying stocks – the media was busy telling them about The Great Recession and how the world was coming apart at the seams.

Today, it provides saturation coverage of home foreclosures, personal bankruptcies and endless political carping. And because we’re blanketed with bad news, few investors see the positives. Consider, for example:

• The Fed has taken interest rates to near zero. That makes it cheaper for consumers and businesses to borrow. It also makes ultra-low-yielding cash a horrible investment.

• Inflation – the great bane of both stock and bond investors – is M.I.A. With the consumer price index showing virtually no increase, businesses don’t have to battle rising costs.

• Around the globe, most stocks are unloved and undervalued. Historically, when the P/E of the S&P 500 has dropped dramatically – as it has since the highs of May – it isn’t long before the market puts on a significant rally.

A Leaner Corporate America Could Drive the Next Rally

I know analysts are saying that earnings won’t be anything great. But they could be wrong – yet again – for two key reasons.

1. Businesses have tightened up their cost structure, laid off unnecessary personnel and refinanced debt at lower levels. Even a modest uptick in sales could deliver surprisingly good bottom-line growth.
2. It’s so cheap for businesses to borrow right now that I expect we’ll see many of them issuing debt to buy back their own shares. This could lead to robust growth in earnings per share, even if growth in gross earnings is less dramatic.

The bottom line?

Investing in Stocks: The Ultimate Contrarian Indicator Right Now

Stocks today are almost as cheap as they were when the Dow hit 6,500 18 months ago. And the macro-economic picture – while always cloudy – is a heck of a lot better now than it was then.

As an investor, look at your options. Cash pays next to nothing. Treasuries yield little more and could easily drop precipitously. Real estate is a non-starter, due to illiquidity, a flood of foreclosures and tough new lending rules.

But stocks offer excellent potential. And if you know anything about contrarian indicators, the fact that so few believe it only confirms it.

Good investing,

Alexander Green

Business/Finance, contrarian investing, Dow 30, Dow Jones Industrial Average, Economics, Equity securities, Finance, Financial economics, Financial markets, fundamental analysis, investment, Market trend, Short, Stock market