Wallet Relief Blog

Scams to come… by Larry Edelson

I’m going to discuss a few things that hardly anyone is warning you about.

Yet, they’re so important, they simply cannot be overlooked. To do so would be foolhardy.

But first, a quick update on what I’m seeing in the markets …

A. The broad stock markets are now within an important timing window for a major low. The month of March should mark the low for stocks for the year.

I can’t tell you exactly where the low will come in on the Dow, but I do know that it will bottom this month and then begin a multi-month powerful rally.

B. Oil has bottomed. It will likely hit $50 next, then the $75 to $80 level. What will drive oil higher? The fundamental explanations from the media will come after the fact. Keep in mind oil, like gold, tends to lead the economy, not lag it.

C. Gold is consolidating and likely preparing for a move to new record highs. It must hold the $891 level to do so. As long as it does, gold should move to as high as $1,250 an ounce on its next leg up.

D. The dollar is firm on a short-term basis, but remains in a long-term bear market. I expect a top in the dollar this month, then the beginning of a protracted decline in the greenback as the Fed’s flooding of the economy and monetization of debt begins to inflate asset prices and deflate the dollar.

E. Long-term bond markets are a disaster in the making. Especially long-term U.S. treasury bonds. Continue to steer clear of them. There is simply no way they are going to hold their value in the face of at least $2 TRILLION in debt auctions this year from the Treasury. Even if the Fed buys those bonds to try and support the market.

If you’ve been following my column, and especially my Real Wealth Report, you’re positioned nicely for the markets and for what’s going to unfold over the rest of this year.

Targets of Vulnerability

Now, let’s take a look at something I find terribly troublesome … that very few are talking about … yet is critically important …

Most people think the era of scams in the markets and investments is over. Kaput.

After all, from the tech bubble to Enron and WorldCom … from the real estate and mortgage train wreck, to Madoff’s $50 billion Ponzi scheme … we’ve seen every kind of scam possible, right?

Wrong! Fact is, beneath the surface of every bear market lies new scams being hatched … scores more dishonest operators and flimflam con artists …

… and sadly, tens of millions of vulnerable investors ready willing and able to try and grab any opportunity to make back even just a fraction of what they’ve lost in the markets. Or keep their job. Or supplement their income.

Madoff may be the biggest scam revealed so far, but there are tens of thousands of smaller scams going on now that involve billions more.
“Hope” is a wonderfully positive emotion. But it can also be deadly to your finances, especially when you’re vulnerable.

All told, I count at least 124 new scams lurking out there right now — along with many old scams with new twists — that you need to be acutely aware of.

Even the economic stimulus package, which was only signed last month, is already spawning numerous scams trying to entice people with promises of free government cash.

Chief amongst the victims …

• Homeowners having trouble paying their mortgages or in default. This group is especially vulnerable to newly-hatched scams that promise to forestall foreclosures, help with mortgage payments, refinancing, and more.

• Investors who have suffered enormous losses, which is just about everyone today.

• The unemployed, desperate to find new jobs. Even those gainfully employed, but worried about their jobs, and those seeking second incomes from part-time jobs and even home-biz opportunities.

• Senior citizens, who are especially vulnerable to scams today because they largely rely on fixed incomes … where interest rates are now effectively zero.

• Small and medium-sized businesses looking for short-term credit lines and financing needs.

• Students, many of whom are having a tougher time financing their educations and recent grads looking for jobs.

Beware of These Major Scams

Sadly, the above groups comprise just about everyone under the sun. So this issue, in my opinion, couldn’t be timelier.

The scams unfolding today? Here are some of the most prevalent ones that I think you need to be aware of and some that are just getting started — all of which are rapidly on the rise …

** Foreclosure scams: Here are 3 most common:

Phony Counseling or “Phantom Help”: The “counselor” tells the homeowner that he can negotiate a deal with their lender to save their home.

In exchange for an exorbitant fee, the scam artist claims he will handle all the details. But once the fee is paid, the phony counselor disappears with the homeowner’s money as well as with their personal financial information.

The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back.

Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the “rescuer” walks off with most or all of the equity.

The bait-and-switch: Homeowners are duped into signing documents for what they think is a new loan to bring their mortgage current. But what they are really signing are forged documents ceding the title of their house to the scammer. Homeowners usually don’t know they’ve been scammed until they get an eviction notice.

Foreclosure scams are rampant in today’s depressed housing market.

Also included, a new rash of home improvement scams, where operators try to prove to you that by spending a few bucks on improving your home, with convincing pitches that you’ll be able to sell it more quickly and at a much higher price.

While in many cases home improvements do help, don’t make any improvements unless A) you can afford it, B) you’re not borrowing money to do it, and C) you thoroughly check out who you’re dealing with.

Examples: I recently read of operators on the East coast preying on homeowners telling them if they don’t change their outside cable and telephone lines to comply with the requirements of the upcoming change to digital TV, their homes will lose value and be more difficult to sell.

I’ve also read of HVAC trades people preying on homeowners to get them to replace their older air conditioning unit and compressors over to Puron, a more environmentally friendly refrigerant than Freon. The pitch: The investment offers tax credits and also makes a home more marketable.

How to protect yourself: Do your homework. Check references. Be sure any company you work with is appropriately licensed (and insured) to do business. Check for complaints against the company.

** Debt elimination/reduction scams. These are all over the place now, and unfortunately, wrought with illegitimate operators who claim they can reduce or even eliminate credit card or other debt, but charge excessively high fees, fail to pay creditors as promised, or do other shady things that put you in a worse financial position.

If you need help with debt problems, take time to seek out a legitimate credit counseling organization.

** High-return investment and savings pitches: Preying on investors’ desire to earn back losses or get higher returns on savings. The pitches can run the gamut from “risk-free” investments in the stock market … to Certificates of Deposit yielding 6 percent … 7 percent … 9 percent or even more.

If you’re offered, say, a savings interest rate that’s more than 3 percent or 4 percent above market rates, it’s probably a scam — or at best, a legitimate investment that carries some hidden large risk, either spelled out in very-hard-to-find-or-understand fine print.

Or by locking your money up much longer than you ever thought or are being told, and likely in a weak, vulnerable financial institution.

Your best defense: Use common sense — if an investment sounds too good to be true, it probably is.

** Job, unemployment, and income-related scams: Running the gamut now to include everything from offering “job insurance,” which allegedly covers you if you’re laid off … to filing unemployment claims for you (by charging you unnecessary fees) … to “guaranteeing” they’ll find you a job … to promises of riches from part-time home-biz opportunities.

Facts: Don’t pay anyone a red cent to file unemployment claims on your behalf or to anyone promising you they’ll find you a job. As for home biz-opportunities, many are terrific and legitimate.

Many are not. The best way to tell: If a home-biz opportunity requires you to pay significant money upfront to start the business, or to buy loads of inventory to keep in stock, chances are, it’s not a legit business. Be sure to check out the company with your state’s Attorney General’s office or the local BBB.

** Tax scams: On the rise, organizations promising you — for a fee — tax rebates … access to bogus government programs … past due tax settlements, and more. And not just on the Federal level, but also on the state and local levels. Beware.

** New fangled insurance products and related annuity pitches: The insurance industry is in the dumps, but there’s no shortage of new products coming out of this industry, ranging from job insurance to annuity products for your savings that promise high rates of return.

Many of these products are being offered by legitimate companies. Many are not.

My best advice here: Steer clear of all of them, including legitimate offers.

Primary reason: As I just noted, the insurance industry is in the dumps, and some of the biggest names in the industry, like AIG, are failing.

So other than homeowner’s insurance and life insurance and medical coverage needs, I would just simply steer clear of all insurance offers and annuity policies offered by insurance companies.

Be wary of offers that promise relief for debt, investment, tax or insurance problems.

** Reverse mortgages: One of the most worrying of all to me, reverse mortgages, which allow older homeowners over 62 years of age to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.

In a “reverse” mortgage, you receive tax-free money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence.

Reverse mortgages can be a great way for older homeowners who are house-rich but cash-poor to stay in their homes, but boost their financial liquidity.

The catches …

A) Reverse mortgages have very high up-front fees, as much as 8 percent of the home’s value, plus monthly service fees.

So if you’re an older homeowner and you own your home outright, you might be better off taking out a home equity loan.

Even though you’ll have to make monthly payments to repay a home equity loan, in many cases, it can turn out to be less expensive than a reverse mortgage.

B) With a reverse mortgage (and also a home equity loan), you’re tapping the equity in your home and taking on debt.

So if you have any plans of leaving your home in your estate to your children or grandchildren, just keep in mind you might be jeopardizing that, or, leaving your heirs an encumbered property.

Many senior citizens are jumping at the opportunity to cash out some equity in their homes. For many, it’s a big help. But for many others, it’s nothing more than going deeply into debt and hocking your home.

So, think this decision through carefully before you entertain a reverse mortgage, comparing its costs to that of just getting a plain old home equity line instead.

Also be aware of …

** Mystery shopping scams. Classified ads or unsolicited emails where the scammer claims they are sending you a check but instructing you to make purchases and then, after deducting a “commission,” to wire the remaining funds back.

The check is fake, but the victim has withdrawn real money and sent it to the scammer. Fake checks are now showing up in lottery scams, internet auction scams, and rental scams. These checks look real, but they are just a way to steal your money.

Prize and sweepstakes scams. Also on the rise now, the victim is told he or she has won something and just has to send a check to cover the taxes. Or the victim is sent a fake check for $5,000 and told to deposit the check and send back $2,000 to cover the taxes.

By the time the victim figures out the check is bogus it’s too late.

In addition to the above, please be acutely aware that identity theft — already growing rapidly before this financial crisis hit — is exploding exponentially higher. In fact, it was the top consumer scam complaint in 2008.

One reason is plain, old-fashioned greed. But another reason is the confusion in the market place caused by the increase in bank and credit card mergers.

For instance, WaMu credit cards were just merged with Chase. I have a WaMu card and have received at least eight notices from WaMu urging me to go to a Chase website via a link provided in the email to verify my card. All of the notices I received were scams, so-called “phishing” attacks to try and get my credit card and other personal information.

How could I tell? First, every single one of the emails I received contained either multiple spelling errors or multiple formatting errors, none of which a legitimate company would most likely ever make.

Second, legitimate institutions or companies will never ask for your personal information via email or request you click a link to provide such information.

Bottom line: Email and online scammers are now taking advantage of the huge uncertainty and rash of mergers in the banking and financial industries to prey on innocent victims.

Indeed, according to a recent study by fraud-tracking firm Javelin Research, identity theft soared 22 percent from 2007 to 2008 … while spyware attacks from November 2008 through January 2009 soared 169 percent according to analysts at the internet security firm Lavasoft.

How to Play It Safe

I’ve been doing all of my banking and bill paying online for over nine years now, and have never had a problem. The safety measures I take …

1. I NEVER respond to any emails I receive regarding any of my accounts.

2. When I get any email notifications of any kind from one of my financial institutions, I NEVER click through the email. Instead, I go directly to the institutions website to check the bill, the message, whatever the subject of the email is.

3. Whenever I go to any of my financial institutions’ websites, or make a purchase online, I always check to be sure the beginning of the URL has a “https” prefix, the “s” meaning it’s a secure website.

4. I follow all prudent online safety measures, such as using different usernames and passwords (which I keep track of in a spreadsheet) … never divulging them to anyone … frequently changing them … and more, including always having up-to-date virus and spyware software.

For virus software, I use Norton Anti-virus. Their 2009 edition is excellent and does not slow your computer down.

For anti-spyware, I use Spybot, shareware that’s available with updates at http://www.safer-networking.org/en/home/index.html.

Now is the time to be more vigilantly protecting your money than ever before!

Be safe and best wishes,

Larry

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This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

The Chinese Perspective: What Global Recession?
by Tony Sagami

You’ve probably never heard of the Canton Fair, but it is the largest trade fair in the world, where thousands of manufacturers, businessmen, and merchants gather to conduct business.

The Canton Fair is co-hosted by the Ministry of Commerce of the People’s Republic of China and the People’s Government of Guangdong Province, and organized by the China Foreign Trade Centre.

Also known as the China Import & Export Fair, the Canton Fair has been held in the spring and fall since 1957 and has the largest assortment of products, the highest attendance, and the largest number of business deals made at any trade show on the planet.

22,000 exhibitors and 200,000 buyers from more than 200 countries gather in Guangzhou (formerly known as Canton) to find everything from industrial products, textiles and garments, medicines and health products, gifts, and consumer goods.

At the most recent fair, a total of $38.2 billion worth of goods were ordered, accounting for a whopping 25% of China’s entire annual export total. The Canton Fair is simply the single most important business event of the year.

Hey! Somebody needs to tell the businessmen at the Canton Fair that the world is falling into a deep global recession because the businessmen in attendance are too busy making money to listen to what the “experts” from Wall Street and CNBC keep telling us.

Exports Fuel China’s Unstoppable Economy

Get this: The number of exhibitors at the Canton Fair hit 53,000, 10% more than just six months ago.

The reason is simple - the export business is still booming. According to the Ministry of Commerce, China’s exports rose 22.3% to $1.07 trillion during the first three quarters of this year. In September alone, exports rose by 21.5% a year earlier and China boasted a trade surplus of $29.3 billion.

“Export figures do not seem to be very discouraging now,” confirms Zhang Yansheng, director of the International Economic Research Institute of the National Development and Reform Commission.

“China’s economic fundamentals are still strong, so are exports,” Yao Shenhong, a Ministry of Commerce spokesman concurs.

Example: Haier Group, the largest appliance manufacturer in China, reported a 10% increase in foreign sales in the first nine months of the year.

Of course, the good fortune isn’t universal. What is happening is that Chinese exports to the U.S. and Europe are rapidly slowing, but exports to its Asian neighbors, Russia, Latin American, Africa, and the Middle East are skyrocketing.

It may sound ironic, but exports to developed countries are plummeting but exports to emerging markets are soaring.

The reason for the dichotomy is simple: Developed countries are sitting on billions of quasi-worthless mortgage bonds, while emerging market countries never had enough money to invest in the toxic bonds our Wall Street alchemists created, packed, and peddled.

China, for example, has a closed financial system that severely limited how many Chinese companies, banks, and governmental agencies are allowed to invest in foreign securities. China simply doesn’t own a meaningful amount of our crappy mortgage bonds.

Even Chinese consumers are in solid shape. The total household debt as a percentage of GDP in the U.S. is more than 100%, but is only a meager 13% in China.

The result is that for the first time that I can remember in my 30-year investment career, the risk of investing in the developed countries is higher than investing in emerging markets.

Market moves to make now

China’s good fortune in the midst of economic crisis in the U.S. may not make market conditions in the West more palpable, but it does offer a ray of hope. Here’s what you should do:

Step 1: Use rallies to reduce your U.S. holdings. The market has been very volatile, but volatility can be your friend if you use big dips as buying opportunities and big rallies as selling opportunities. That is exactly what I did last Monday when the Dow Jones soared by 936 points and I trimmed my U.S. holdings.

Step 2: Dump the station wagon for a Ferrari. Given the choice of hitching your investment wagon to a slow jalopy headed for the junk yard or a 200-mph high-performance sports car … I’ll take the faster ride every time. I suggest the same for your portfolio and recommend that you overweigh your portfolio with stocks, funds, and/or ETFs from Asia, Latin America, and the Middle East.

Step 3: Buy yourself some “haywire” insurance. I’ve been saying this for a long time, but I’ll say it again: I expect the U.S. economy and the U.S. stock market to get ugly. If things do get ugly, the best haywire insurance you can buy is gold, gold stocks, or gold funds.

Lastly, the one thing that you should NOT do is do nothing. Don’t let the volatility turn you into a deer-in-the-headlights investor who is too frightened to do anything. Doing nothing has been a very costly strategy in the last month and I expect the cost of inaction to go even higher.

Tony Sagami

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Why Mortgage Rates Are Rising Despite Government Efforts!
by Mike Larson

The government is throwing everything … and I do mean EVERYTHING … at the credit and mortgage markets.

It has taken over Fannie Mae and Freddie Mac.

It has agreed to buy Mortgage Backed Securities (MBS) in the open market.

It has pledged to take hundreds of billions of dollars in crummy assets from the nation’s major financial firms.

And it has promised to infuse the banking system with as much as $250 billion in capital.

The primary goal of all these bailout efforts: To lower the financing costs associated with home purchases.

But the result of all these efforts is that mortgage rates are going up.

Yes, I said UP. Let me explain …

Bond Investors Are Asking: “What Price, Bailouts?”

The 30-year fixed mortgage is America’s bread and butter loan. Long before the industry thought up new and creative ways for borrowers to bury themselves in horrid loans, it’s what home buyers typically used to purchase a home. And it’s what I believe both borrowers and lenders are returning to because of the safety and stability that a long-term, fixed rate mortgage provides.

But rates on 30-year fixed loans aren’t going down. They’re going up.

The average 30-year rate jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%), itself the highest in more than a year.

How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets?

Because bond investors are dumping the heck out of bonds - and when bond PRICES fall, bond YIELDS (interest rates) rise.

Why are investors selling bonds? Well, we just learned that the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30, 2008. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country.

Thanks to all the fresh bailout programs, the deficit will likely surge by a few hundred billion MORE dollars in fiscal 2009 - and it could easily top $1 TRILLION.

But no one in Washington has shown any willingness to raise taxes to pay for all of these bailout programs. And it’s not like there’s a pile of money just sitting around in the U.S. Treasury to fund them, either.

We’re a net debtor nation, and we’re going to have to borrow hundreds of billions of dollars to make good on all of our promises.

That means a flood of Treasury debt the likes of which we’ve never seen is going to wash over the market in the coming year or two.

Bond traders know that will overwhelm bond demand. So they’re not sticking around. They’re selling the heck out of bonds NOW, driving prices down and rates up.

Long bond futures plunged from an intraday high of 124 23/32 in mid-September to around 114 now - a decline of more than ten points in price.

Since bond yields move in the opposite direction of prices, they’re going up. The benchmark 10-year Treasury Note now yields about 4%, up from the 3.4% area in September.

Look, politicians and policymakers would like you to think they can just wave a magic wand, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2003 to 2007.

But they can’t. The bond market is pushing back and saying loud and clear: “There is no such thing as a free lunch.”

My bottom line message hasn’t changed, either. I continue to expect any recovery in the housing and credit markets to take a long time. And I continue to believe that while all of these government bailout programs can treat some of the downturn’s symptoms, they can’t cure the underlying disease. The only real cures are time and price changes.

Until next time,

Mike Larson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Dow Drops 733; Another Reason to Like Gold
by Larry Edelson

The credit collapse is not entirely over. Nor is its impact on Main Street.

And as we saw yesterday, there will be more sell-offs, sharp ones that scare the dickens out of nearly everyone.

That’s why I suggest sticking mainly with natural resource-based companies that operate businesses which deal in assets that have intrinsic value - and that will be the main recipients of the next wave of what I call the “Great Re-inflation.”

At the top of that list is my all-time favorite: Gold.

You know I’m a gold bug. And given everything that’s happening in the world today, I’m more of a gold bug than ever before.

How can you NOT be in gold?

There are dozens of reasons I believe everyone must own some gold. But lately, there’s another one that’s rising to the surface …

China Is Soon Going to Make Some Big Buys In the Gold Market

Just yesterday, China’s central bank announced that its foreign-exchange reserves rose to a record $1.905 trillion.

If China were to lay this nearly $2 trillion in surplus reserves end-to-end using dollar bills, the trail would stretch for 193,813,130 miles. That’s enough to wrap around the widest part of the earth 7,752 times!

Clearly, Beijing’s piggy bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.

Compare it to Washington, which now has nearly $11.4 trillion in debts, not counting the contingent liabilities of the real estate crisis, Social Security or Medicare.

Whose paper currency do you think should have more purchasing power? Naturally, the yuan. Yet that’s not the case - the dollar remains stronger.

But not for long.

I warned of this a couple of years ago, but now the signs are even clearer: Over the next few years China is essentially going to corner the world’s gold market.

It’s one of the chief reasons I am now even more bullish on gold, expecting the price of the precious yellow metal to eventually exceed $2,000 an ounce.

Mind you, Beijing won’t intentionally set out to corner the gold market. But, in effect, that will be the end result.

Take it from me. I’ve met with central bankers, regulators, and gold traders in China and Asia. I know Beijing’s views on the yuan and gold.

You see, Beijing knows that the dollar’s status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world’s reserve currency in the early 20th century.

And authorities in Beijing also believe that as China rapidly progresses toward superpower economic status, the yuan should be a world-class, stable medium of exchange.

They envision the yuan as a major international currency some day, with as much (or more) status than the U.S. dollar. That’s why they’re going to back the yuan with gold … loads of it.

Plus, there’s another reason for Beijing to buy more gold as part of China’s piggy bank. China has an estimated $1.3 trillion invested in dollar-denominated investments. They can’t get out of the dollar quickly. It would destroy the U.S. economy which would have a direct negative impact on China.

So the smart thing to do: Hedge and diversify existing dollar holdings with gold.

Consider this: Right now, China has a mere 0.9% of its reserves in gold (600 tons). That’s the lowest of any industrialized economy! To put it into perspective …

• The U.S. has 77.3% of its foreign reserves in gold.

• The European Union has 23% of its reserves in gold.

• Lithuania, Mozambique, and even tiny Nepal all have more of their reserves in gold than China.
Just to up its reserves to 5% in gold, Beijing would have to purchase $93 billion worth of bullion. That could easily send the yellow metal skyrocketing to more than $2,000 an ounce.

And if China were to match roughly half of the gold reserves held by the United States, it would have to buy another $636 billion worth. That kind of buying would send gold to well more than $2,000 an ounce. Probably to $3,000, or even higher.

My view: China has already started purchasing small amounts of gold. It’s one of the reasons gold is now holding support at its 1980 high in the mid-$800 level, well above important support levels on the charts from $600 up to $735 an ounce.

This is yet another reason I recommended you substantially increase your gold holdings back in mid-September 2008.

I believe gold is still one of the best bets out there, loaded with huge profit opportunities. No matter what aspect of the market I examine, I see much, much higher prices to come for the precious yellow metal.

Larry Edelson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Why Financial Collapses Are Unavoidable And Government Actions May Be Backfiring
by Martin D. Weiss, Ph.D. 10-13-08

Open Letter to:
Dominique Strauss-Kahn, Managing Director of The International Monetary Fund (IMF)

From:
Martin D. Weiss, Ph.D., Chairman, Sound Dollar Committee

Dear IMF Managing Director Strauss-Kahn:

This past Saturday, October 11, 2008 at a joint press conference by world economic leaders, you said:

“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”

Further, in an attempt to prevent that potentially traumatic outcome, some of the world’s largest nations have proposed a series of new steps, including massive direct injections of taxpayer capital into private-sector banks.

This brings us to a crossroads that can determine the fate of six billion people for decades to come, a dire reality that motivates me to write you today.

I am president of Weiss Research, Inc., an independent research corporation, and Chairman of the Sound Dollar Committee, a nonprofit, nonpartisan organization founded by my father in 1959.

The Sound Dollar Committee was instrumental in helping President Dwight D. Eisenhower achieve one of the only truly balanced budgets of the past half century. And in keeping with that tradition, we continue to promote fiscal responsibility, sound business practices, and prudent investing.

Over the years, we have learned how elusive these goals can be. And by the same token, I recognize the unusual difficulty of the current challenges you face.

However, it is undeniable that the new rescue proposals being made today go beyond the already-extreme efforts announced or undertaken previously, such as the $700 billion bailout package signed into law by President Bush ten days ago, the unprecedented $1 trillion in central bank liquidity injections during the prior week, and additional extreme measures by the U.K., Germany and other leading nations.

It is also undeniable that those efforts have not yet been effective, leading us to wonder if new efforts will be any different. Before implementing them, therefore, I believe it behooves us to consider some ominous trends:

1. Government interventions are backfiring.

Since the credit crisis burst onto the global scene approximately 14 months ago, each new government countermeasure seems to have backfired.

Rather than encouraging investors to make the rational choice of shifting assets to stronger hands, governments have inadvertently done precisely the opposite. They have promoted irrational complacency. They have encouraged imprudent inaction. They may have also prompted investors to shift some assets back to weaker hands.

Repeatedly, the authorities pursued a policy that made individual and institutional investors more confident than the circumstances warranted. This policy, in turn, prompted investors to buy more common shares in insolvent banks, more junk bonds in over-rated corporations, and more derivatives contracts based on unrealistic models - all despite abundant evidence that the banks’ balance sheets were continuing to deteriorate.

Earlier, various government measures seeking to reduce the panic - such as coordinated central bank intervention - did buy some time by temporarily reducing investor fears. And during those quieter interludes, policymakers were able to artificially drive down the premiums charged by lenders for higher risk loans.

But this was accomplished despite the deterioration in balance sheets.

In other words, each time governments intervened, the cost charged for risk came down, but the level of risk continued to rise. Instead of bringing stability to the marketplace, the authorities created a dangerous discrepancy between the two - between price and reality.

Result: As soon as the immediate effects of the interventions dissipated, and as soon as symptoms of the true risk levels resurfaced, there were sudden, explosive market adjustments.

Investors seeking to avoid devastating losses dumped their high-risk assets. Other investors, who otherwise might have not been unduly impacted by the turmoil, suffered parallel losses. And the general public, previously less cognizant of the financial turmoil, suffered surging anxiety.

The authorities may have exacerbated the very panic they were seeking to avoid. And now, as the public begins to connect the dots between government actions and market reactions, the quiet time bought with each new intervention has diminished or even vanished.

2. Government actions are too little, too late to stem the debt crisis.

Kindly refer to our white paper submitted to the U.S. Congress on September 25, 2008, titled “Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market.”

In it, we detail why the U.S. debt crisis alone was far larger than previously believed. As of the first quarter, it encompassed or affected

• 1,479 banks and 158 thrifts at risk of failure with $3.2 trillion in assets, or 41 times the bank assets estimated at risk by the FDIC.

• $14.8 trillion in residential and commercial mortgages, $20.4 trillion in consumer and corporate debt, plus $2.7 trillion in municipal debts outstanding.

• $180.3 trillion in notional value derivatives, of which one single institution - JPMorgan Chase - held $90 trillion, or 49.9% of the total U.S. market share.

• $465 billion in credit exposure to derivatives, up 159% from one year earlier.

Today, less than three weeks later, it appears that many of these debts and bets are falling like a house of cards. Moreover, in retrospect, it appears that many of the efforts to support or sustain them may have been futile, wasteful, or both.

3. Government actions are too much, too soon for the debt markets.

In its Fiscal Year 2009 Mid-Session Review, Budget of the U.S. Government, the Office of Management and Budget (OMB) projected the 2009 U.S. federal deficit will rise to $482 billion, a major burden on U.S. debt markets. However, that OMB projection was made before the recent bailout commitments were known or even imagined.

Since then, the expenditures and liabilities announced or proposed by the U.S. government have easily exceeded $1 trillion.

However, for the world’s debt markets - the primary source of federal government deficit financing - the expectation of exploding federal deficits is damaging confidence. It may even be one of the factors responsible for the global paralysis of short-term credit markets. And it may also be one of the reasons why, this past Friday, October 10, we witnessed the worst-ever collapse of high-yield corporate bonds.

4. Government bailouts could endanger government credit and credibility.

The credit market contagion has spread in phases:

• In the mortgage sector, it was initially confined to subprime mortgages. Then it reached the mid-level Alt-A mortgages. And now it has affected prime mortgages.

• In short-term credit markets, it was first restricted to commercial paper issued by weak financial institutions. Next, it spread to the short-term paper of stronger financial institutions. And now it has hurt nonfinancial paper as well.

• In bonds, it began with the most speculative junk bonds, then reached middle-tier bonds, and now has impacted most corporate bonds of all stripes.

Each time, frightened investors sought the safety of government paper. And each time, this fear factor drove up government bond prices while driving down their interest rates.

This may be giving U.S. Treasury officials the false impression that they enjoy strong investor demand for government securities and easy access to funds for more handouts to near-bankrupt corporations. But this influx of money may also be obscuring a frightening prospect:

Governments could be the next victims.

To the degree that the authorities pursue the purchase of bad bank assets, or to the extent that they go forward with the injection of government capital into a collapsing banking system, they may become subject to the same contagion of mistrust.

I implore you: Please do everything in your power to help prevent that from happening. If the governments’ heretofore stellar credit is sucked into this crisis, it could

• make it much more expensive for governments to roll over their maturing debts;

• make it difficult to raise the cash needed to maintain government operations; and

• ironically, deprive authorities of the last weapon they have to help bring about a subsequent recovery: The credit and credibility of the world’s leading governments.

5. Government actions could aggravate, or even cause, the systemic meltdown they are seeking to prevent.

Reason should dictate that governments should do everything possible to liquidate insolvent institutions, quarantine the weakest institutions, fortify the strongest, and insulate the government’s own credit from the scourge. Instead, it seems that U.S. and European authorities are doing precisely the opposite. They are engineering

• shotgun mergers that sweep bad assets under the carpet of otherwise stronger institutions;

• bailouts that create zombie banks and corporations, weakening the system as a whole; and

• new, bigger and unaffordable FDIC-type guarantees of bank deposits that further obscure the difference between worthy and unworthy banks.

The long-term, fundamental affect of these actions is widely known: They are corrosive. They cause far more losses and pain in the end.

What’s not so widely recognized is that the short-term consequences could be equally catastrophic:
By

• combining bad assets with good assets,

• merging weak banks with strong banks, and

• confusing risk with safety,

the authorities are merely making it more difficult for millions of savers and investors to discriminate between each of the above.

The result: Instead of shifting from riskier banks to safer banks, many people are exiting the banking system entirely.

Inadvertently, the authorities could be transforming what should have been a shift within the system to a run on the system.

Instead of a harsh, but ultimately manageable, collapse of the weakest institutions, they could be leading us toward the systemic meltdown you warned about this weekend.

6. Governments are squandering scarce capital that will be needed for a true recovery after any collapse.

No one wants a collapse.

We all abhor the tremendous hardship it will inevitably cause - not just for the few who have the most to lose, but also for the many who have lost hope of anything to gain.

But a financial collapse, no matter how dramatic, is not the end of the world. We have endured many such collapses before and we survived. We can survive this one as well.

Today, it seems the relevant debate is no longer whether or not a financial collapse is preventable. The collapse is already here.

Rather, the main topics worthy of discussion are how big the collapse will be, how long it will last, and what we can do today to maximize the chances of a healthy recovery in the future. Below, I provide my view on each of these topics separately:

The size of the collapse is not within our power to control. We cannot repeal the law of gravity; we cannot stop investors from selling. Nor can we turn back the clock to reverse the financial sins already committed. One way or another, the bad debts have to be expunged. And the events of recent weeks are telling us that a deflationary debt collapse may be the mechanism.

The duration of the decline depends on its speed. To the degree that we let the debt liquidation process happen naturally and manage it wisely, it should be short, fast and behind us soon; to the degree that we stop it from happening and sweep the debts under the rug, it could be long, slow and more tortuous.

It’s in the nature of the subsequent recovery that I feel you can have the greatest influence today. If you protect the credit of the financially sound institutions, they can be powerful resources to help bring about a recovery. However, if you prematurely squander our precious resources now, then any subsequent recovery is bound to be weakened and delayed.

I have four recommendations, as follows:

First, cut back the bailout and rescue efforts.

Second, protect the credit and credibility of sovereign government debts.

Third, preserve public resources for (a) emergency assistance to those that are rendered ill or destitute during a secular economic decline, and (b) carefully planned economic stimulus after a secular decline.

Fourth, foster an environment of public trust by guiding consumers to research that can help them better distinguish between low- and high-risk banks, insurance companies, and other financial institutions.

I know it will be very difficult. I realize millions of people must make great sacrifices. But with the right guidance and leadership, I am sure we’ll be ready to step up to the challenge.

Sincerely,

Martin D. Weiss, Ph.D.

This financial news report is available courtesy of Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From the Money and Markets newsletter, October 5, 2006 edition:

At the height of the U.S. Civil War, the combined military expenditures of the North and South were running at an estimated $2.5 million per day – $29.5 billion a day in today’s dollars.

By the end of the war in 1865, $8 billion had been spent, the equivalent of $944 billion today.

To cover the staggering costs, taxes, tariffs and duties were raised to new highs. Tidal waves of government bonds were issued. Interest rates soared. Money was printed with reckless abandon, and inflation took off like a bat out of hell.

The result: By the end of the Civil War, both the Confederate and Union currencies had lost so much value that a pair of boots cost $2,361 in today’s dollars. Butter was the equivalent of $177 per pound.

No one wanted to hold paper currency, period. But the stock market, viewed as an inflation hedge, soared during much of the war, with some issues, especially railroads, rising 50%, 60%, 70%, or more.

Even so, some of the biggest gains were being made in the gold trading pit in New York: Between 1861 and 1863, the price of gold shot up from $20.67 to over $35 an ounce, a 75% gain.

In 1864, gold exploded to $53.35, or $800 in today’s dollars. It then went even higher, nearly tripling to $162.50 on September 24, 1869. That’s $2,252 an ounce in today’s dollars!

Prices finally retreated when President Grant broke the back of the bull market and the U.S. Treasury dumped more than $4 million of gold on the market. Still, the price of gold never fell below its pre-Civil War level of $20.67.

Jim Fisk and Jay Gould, who led the gold rally in the 1860s, are history. Twenty-four U.S. presidents have come and gone. The characters have changed, but the song remains the same …

Why Circumstances Today Are Eerily Similar to the Forces Behind the Civil War Gold Boom

The war on terror is costing the U.S. $200 million every 24 hours. To date, the war has cost $332 billion.

Nobel Prize-winning economist Joseph Stiglitz estimates the total cost of the war will end up north of $1 trillion, including up to $300 billion in future health costs for wounded troops. That’s nearly 20% of our country’s current gross domestic product.

And in terms of expenditures per soldier, the war on terror is the most expensive war in the history of the U.S.

As in the 1860s, the national debt is now mushrooming out of control. Including government agencies and government-sponsored enterprises, it stands at $11.3 trillion today.

That’s more than $37,000 of debt for every man, woman, and child in the U.S.

The total IOUs the government is now liable for — including unfunded Social Security, Medicare, government pensions, military benefits, and more — is an estimated $54 trillion.

Meanwhile, much like during the Civil War, the U.S. dollar is coming under pressure, creating the equivalent of a financial black hole. In the past four years alone, the dollar has lost an average of 30% of its value against a basket of the world’s currencies.

As you can see from the chart, the U.S. dollar stands on the edge of a precipice, and it looks like it’s about to start plunging anew. This is why I think …

Gold Remains Your Single Best Protection

To be sure, there are huge differences between the 19th century Civil War and the 21st century War on Terror. But the parallels in the economic environments are not to be underestimated, in my view.

I’ve long thought that gold could easily hit $1,000 an ounce. Today, I’m more certain than ever. Indeed, by the time this gold bull market ends, I’m quite confident we’ll see the yellow metal at more than $2,000.

Food for thought: Gold’s 1980 high of $850 an ounce would be the equivalent of $2,150 in today’s dollars if adjusted for inflation over the last 26 years. That’s unusually close to its peak in 1864.

Strange coincidence? I don’t think so. It’s just another indication that the $2,000 level is not an unrealistic target.

By far, the most important thing to realize is this: Gold is the single best protection against the scenario we see unfolding. And, as an investment to hold for the next several years, I think it’s better than bonds, better than Dow stocks, and better than tech stocks. In fact, gold is a better long-term investment than any other asset out there, in my opinion.

Reason: Gold should hold its value more firmly than nearly all other assets during broad declines, and it should substantially outperform during major advances.

I believe that, long term, it has more upside potential than silver, oil, or copper. Gold is money … real money … real wealth. It has stood the test of time, like no other asset in the world. Its history goes back over 5,000 years. And its history should go on for another 5,000.

That doesn’t mean you should run out and put 100% of your money into gold. Far from it! Keep no more than 10% of your net worth in physical gold or the equivalent, using today’s gold bullion Exchange-Traded Funds, like the StreetTracks Gold Fund (GLD).

You might also consider putting another 10% into gold mining shares, where you get upside leverage on the price of precious yellow metal.

A few rules though …

Rule #1: Never invest in just one mining company. Rather, invest in a minimum of three at a time for diversification.

Rule #2: Stay away from mining companies that hedge more than 50% of their in-ground gold reserves, or their annual gold production. In a rising gold market, those so-called “hedges” could cause serious losses.

Rule #3: For gold mining shares, I like to use a trailing 10% stop loss to help reduce risk. Don’t lower the stop when the market moves against you. But raise it each time the stock gains 3% from your entry price on a closing basis. If you’re stopped out, don’t fret. Assuming there hasn’t been any serious adverse fundamental change in the company, there should be ample opportunity to get back in — either on the next dip, or when the stock shows renewed strength.

Rule #4: Always keep the big picture in view. The gold strategies I’m talking about here are designed for your core, long-term portfolio. What the price of gold does from one day to the next should not be an issue for you.

You’re riding a major trend. Let it do most of the work for you.

Larry

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com

If you are retired you have a great opportunity to make money online.  After all, you will have as much time as you need in order to make sure that you are a success.  Unlike other people that try to make money online, you will not have to work another job in order to stay afloat financially.  You can make this work to your advantage, and be making money online before you ever thought possible.

Listed below are a few tips that you should follow if you are retired and looking to make money online.

1. The first thing that you will need to do is make sure that you have enough knowledge of the internet to be successful.  Some retirees never used the internet in the past.  If you do not have experience online there is no reason to give up on your goal.  Simply get connected and start dabbling.  For assistance you may want to purchase a book or two on getting started online.  These will give you basic information on the internet, and what you need to know to get started.  You may also want to take a course at a local community college.  This is a great way of getting first hand instructions from a professional.

2. When you are ready to go, the next thing that you must do is make a decision as to how you want to make money.  Do you want to start an online business?  Or do you want to use affiliate programs to make money?  Some retirees find that the easiest way to make money online is to bring their past work knowledge into their venture.  This way they already have knowledge on the industry.  This is a great option that you should consider. 

3. After getting your business idea in line, you will need to set up a business and marketing plan.  This will help to keep you on track during your quest to make money online.  By having a business plan in place you will be able to stay on track no matter what is thrown at you.  And a marketing plan is very important so that people know you exist.

4. Stay patient when trying to make money online.  Just like anything else you are going to run into problems along the way, and you will probably feel like giving up.  But by staying with your plan, you will reach your goals soon enough.

Overall, retired people can make a lot of money online.  If you are in this situation, you will want to follow the tips above in order to get started.  By doing so you will be on track to making money online, and supplementing your income. 

Affiliate programs are a great way to increase traffic to and sales for your web site. There are several affiliate tracking software solutions that keep track of sales, clicks, and commissions.

Affiliate tracking software solutions come in a variety of packages.  Software for a click-based program allows you to pay affiliates a set rate for each visitor to your web site.  Look for click-based software with helpful features including click-through tracking, link code generation (keep banners current and linked correctly), referral tracking, and detailed stats.

Other software lets you set up a commission or flat rate pay for each potential customer sent via your affiliate member.  You can also customize the commission schedule for individual affiliates.  Commission-based programs can be more economical because you only pay affiliates when their referrals generate sales.  

You don’t have to choose between click-based or commission affiliate tracking software.  Programs are available that let you use both pay arrangements.

Many affiliate tracking software solutions now have private affiliate network capability.  This feature is helpful for those with multiple web sites.  It lets you run one affiliate program for all your web sites on your own private network as opposed to setting up affiliate programs for each site.

How does it work?

The basic premise of affiliate programs is the same for all affiliate tracking software solutions.  An affiliate joins your program by logging into the member area on your web page.  There the affiliate can get the tools needed for linking to your site such as banner codes, text links, and product images. 

When a visitor clicks from the affiliate’s web page to yours, the tracking software places a cookie on the visitor’s computer to track him as he browses your web site.  If the visitor buys a product or service from your web site, the tracking software notes the affiliate responsible for said visitor and records the sale in a database.  The Administrator and the affiliate are both notified of the sale via email.

Affiliate software makes its easy to monitor the success of your affiliate programs by tracking the number of times banners or links are displayed, number of visitors who linked to your web site, and how many of these visits resulted in a sale.  In addition, the software keeps account of commissions earned by and payouts to affiliates.

Helpful Features

Software packages are easy to install and manage.  However, software companies will gladly lend a hand to technically challenged web entrepreneurs. Look for affiliate software tracking solutions that provide reliable tech support and don’t charge setup fees or monthly charges.  The software should be easy to customize for your specific needs.

Other helpful features include:

Unlimited affiliates categories
Automated fraud protection
Performance rewards for your best affiliates
Lifetime upgrades
Multi-level marketing (affiliate program promotes itself and your web site).

Sources

Cosmicperl (cosmicperl.com)
Affiliate Wiz (affiliatewiz.com)
Quality Unit (qualityunit.com)

Investment Perspective and advice from Money and Markets, August 18, 2006
(published with permission):

by Martin Weiss

If you didn’t pay close attention to Steve Chapman when I interviewed him in Money and Markets last year, you may want to listen more carefully now.

He named some of the mutual funds his clients were holding, and each of those is up nicely since, even after the corrections we saw in May and June.

Plus, he said he was avoiding investments in the broad U.S. stock indexes like the S&P 500 and the Nasdaq. And sure enough, those indexes have gone virtually nowhere this year, even after the strong rallies you’ve seen in the last few days.

• The S&P 500, for example, closed last year at 1,254; last night it was at 1,298, up a meager 3.5% for the year.
• The Nasdaq, meanwhile, closed last year at 2,218 and ended the day yesterday at 2,157, down 2.8% for the year.

Not exactly a way to make good money, especially in light of the risk you’re taking with the natural vagaries of the market.

As a portfolio manager for individually managed accounts at our separate affiliate, Weiss Capital Management, Steve Chapman’s views are not necessarily the same as ours in Money and Markets. Nor does he always agree with us about the timing and direction of the stock market.

But in a broad sense, he has a similar investment philosophy. And for the past three years, his primary investment focus has been in some of the same areas we have been highlighting here: Energy, natural resources and emerging markets.

Steve works out of Weiss Capital Management’s separate facility near the PGA Resort, which is virtually across the street from my home here in Jupiter, Florida.

Yesterday I stopped by, and I grabbed the chance to follow up on our earlier discussion …

More Profits and More Risks
Interview with Steve Chapman,
Vice President and Portfolio Manager,
Weiss Capital Management

Martin Weiss: Last year, you named some of the mutual funds you had your clients in at the time such as Eaton Vance Asian Small Companies (EVASX), Fidelity Select Energy (FSENX), Oppenheimer International Small Company (OSMAX) and Goldman Sachs Emerging Markets Debt (GSDAX). What’s your position with these funds right now?

Steve Chapman: I’m staying the course. The clients in our All Star Growth program owned them then, and they own them now. My philosophy is simple: These funds have continued to deliver outstanding performance. So if it ain’t broke, why fix it?

Martin: But in May, the energy sector suffered a correction. So did the emerging markets. What did you do about that?

Steve: I made some minor, mid-course adjustments. I reduced my exposure to the emerging market debt. And I increased my cash position.

Martin: Good for you! But that was then. What about now? Any more adjustments you see on the horizon?

Steve: Yes. I’m getting ready to reinvest now, and I’m going to also look a bit closer to home — including developed, mature economies. I’m seeing a bit more risk in emerging markets, and actually, I think the entire world is getting more risky.

Martin: Please explain.

Steve: I’m wary of all the things you’ve been warning your readers about in Money and Markets. Plus I’m wary of some things you haven’t talked about very much in Money and Markets.

Martin: Examples?

Steve: You’ve talked about Iraq and Iran. But you haven’t talked about the growing feud between Japan and China. You’ve talked about overseas wars, but you haven’t talked about homeland security … or the lack thereof. You’ve warned your readers about the threat of inflation, but I haven’t heard you saying much recently about the slowdown in the economy.

Martin: So overall, you’re scared right now?

Steve: Not scared. Cautious. And not just right now, but always. I’m always very conscious of risk. No matter what’s going on in the market. I’m like the guy walking down Main Street in the Old West: I try to watch my back at every step of the way.

But that doesn’t mean I’m going to hide and sulk into a corner. Heck, if you do that, you stand to miss what I think are some of the most amazing opportunities of our era.

Take Eastern Europe, for example. Nowhere else in the world do I see higher educational standards. You and Elisabeth own the Weiss School for gifted children. You deal with education all the time. So you should know exactly what I’m talking about.

In Eastern Europe, they’re highly educated and very skilled, especially in math and science. And nowhere else do I see such utter eagerness to reach the standard of living that their Western European neighbors enjoy. They’re willing to work for extremely competitive wages.

That makes the area fertile ground for Western companies looking to outsource … and looking for acquisitions. Between the two, it’s a powerful force boosting Eastern European investments, in my view.

Eastern Europe vs.
Other Emerging Markets

Martin: Most people lump Eastern Europe with other emerging markets. But you don’t. Can you share with our readers what you think the differences are?

Steve: Gladly. They’re far removed from the line of fire, from the turmoil you see in other regions. Their culture and people are more modern, without lots of the obstacles to growth you see elsewhere. Their political systems are stable and, remarkably, very democratic.

And if they’re not already a member of the European Union, they’re at least taking some firm steps in that direction.

One of the big risk factors in emerging markets is the stability of the currency. So when you have an anchor, like the euro, which they’re trying synch up with, that helps make me a bit more comfortable, especially in a shaky world.

That’s why I’ve had some of my clients in the Metzler Payden European Emerging Markets Fund since August 2005. The fund specializes in countries like Russia, Hungary, the Czech Republic, Poland and Romania. It gets five stars from Morningstar. It gained 27.84% this year through August 16. And its three-year return is a nice 47.37%.

BRIC Countries

Martin: Last time we spoke, you also liked Latin America, India, China, Has your view changed?

Steve: No. Latin American countries have vast natural resources. Demand for these resources continues to increase. Supplies remain constrained. They’re hooking up with China. And I think their companies are in the right place to benefit from this demand-supply squeeze.

I’m also a big believer in the BRIC countries — Brazil, Russia, India and China. The way I see it, these four are likely to outperform all other emerging markets, excluding the Eastern European countries.

Martin: What do you see driving the BRIC countries’ growth?

Steve: China. But I think investors need to ask two questions: “What does China need? And what does China NOT need?”

We know China does not need labor. They have plenty, and they’re doing a lot of the world’s heavy lifting.

Most people may not realize this, but they also don’t seem to need steel. China has a surplus of steel. So that’s not where I’d put my money right now.

Meanwhile, look at all the world resources China is gobbling up: Among the world’s five major commodities, China is the number one consumer of every single one except for oil. That’s one heck of an appetite.

(Editor’s note: It’s “only” the number TWO consumer of oil.)

And they’re just warming up. Right now, for example, reliable sources estimate that …

Only 18% of rural Chinese own refrigerators.

More than 64 million people in China live on only $117 a month, a population larger than the UK’s.

A staggering 300 million citizens currently lack potable drinking water.

Oil Correction Again?

Martin: Oil is down in the last few days. Once again, we’re hearing talk about lower prices ahead. What do you think is really happening here?

Steve: A couple of miscellaneous items: They supposedly declared “peace” in the Middle East. They downgraded the forecast for hurricanes for this year. They came up with a couple of reasons, but none of that trumps the key factor here.

Martin: Which is …?

Steve: We have no evidence yet of a fundamental change in habits in America. The overwhelming majority of Americans are driving the same cars they drove months ago, the same distances and in the same way. So my view is that the oil price decline you’ve seen in recent days is just one of those natural market fluctuations.

Moreover, the oil stocks I like are still coming out with record-smashing earnings and are still valued very fairly in my opinion. Low PEs.

Martin: So how do you play those?

Steve: I use Fidelity Select Energy (FSENX). Also, I have Fidelity Select Energy Services (FSEXX). And I’ve kept these in the portfolio pretty much since I launched my All Star Growth strategy in August 2004.

India Catching
Up to China

Martin: Last time you told us why you like India. For the sake of readers who may have missed it, can you give us your reasons again?

Steve: It boasts the largest, highly educated, lowest-cost, English-speaking work force in the world. I think that’s even better than Japan’s work force at the dawn of its postwar boom. I think it’s even better than the Chinese workforce that’s had such an impact on the world economy in this decade.

Plus, I think the Chinese revaluation of the yuan, however small, is bound to have a substantial spill-over effect on India.

Martin: Because Indian goods will now be more competitive than Chinese goods?

Steve: Yes. But also because China itself will be buying from India, as a mega-customer.

Martin: And to invest in India, you are using …

Steve: Eaton Vance Asian Small Companies (EVASX) plus the Oppenheimer International Small Company Fund (OSMAX). Year to date, they’re up 19% and 13.6%, respectively. Down from their peaks. But on the comeback trail, in my humble opinion.

Martin: All this raises a very important question: Suppose this turmoil in the world drags down the stock market as a whole? Wouldn’t that hurt even the strongest sectors and the strongest foreign markets?

Steve: Probably. But that’s why investors hire Weiss Capital Management to manage their money. That’s why we watch over their accounts. That’s why we aim to spread out the risk. When investments are not performing, we aim to move on to those that are.

Plus, never forget cash equivalents. Most managers think their job is to always keep nearly all of their clients’ money invested. So they wind up holding and holding even while the markets are falling and falling. I don’t agree with that strategy. Cash is not just a parking place, in my view. It’s also a very valid investment, especially when you can get nice, rising yields.

Naturally, losses are always possible. But our role is to actively manage with the goal of minimizing the downside risk.

No End in Sight to
Commodity Boom

Martin: Last time you talked about surging commodities. Do you think that’s going to continue?

Steve: Yes. But no trend stays exactly the same, and the shift I see coming now is toward food. Because now certain agricultural products are not only used to feed mouths, they’re also being used to fill up gas tanks. I’m talking about corn, soybeans and sugar cane, which are used to make ethanol and bio-diesel.

Another advantage of the food sector: I think it’s relatively recession-proof.

Remember: These countries with big populations are not just growing. They’re modernizing. They’re not just going to need more food. They’re going to want more cars, driving up the demand for gasoline and alternate fuels. They’re going to want more homes, driving up the demand for timber and cement. The kind of demand growth you normally see in years is happening in months.

Martin: And if the trend changes unexpectedly?

Steve: That’s why investors should diversify. No matter what trend is hot right now, you’ve got to stay on the look-out for the next major trend. You can’t fall in love with any particular sector or investment.

46.5% Portfolio Growth
From August 2004
Through June 2006

Martin: Is your program dedicated exclusively to energy, commodities and international?

Steve: Since inception, they’ve been my major concentrations and they’re largely responsible for our performance to date. But I’m not married to them, and I also have some exposure to other sectors.

Martin: Can you give us more info on your performance?

Steve: Since inception — August 6, 2004 — we’re up 46.5% through June 30, 2006. On an average annual basis, that’s 22.3%.

Martin: Is that net of all of your fees and all of the broker’s commissions?

Steve: Yes. That’s the net, net return to the investor.

Martin: So an investor who began with you at the outset would be up about 46% at the end of the second quarter.

Steve: Yes, including all dividends and reinvestment of dividends. I hasten to add, though, that’s all in the past. You can’t hop on a time machine and start investing with us on August 6, 2004. The future, meanwhile, is always uncertain when it comes to investing. We could continue on the same course. We could do better. We could do worse. Or we could go in the opposite direction, and our clients could lose money.

Martin: Understood. But from what I recall from our last interview, some of the funds you use are load funds. Like the two Asian funds, for example. They charge loads, right? So how do you achieve that kind of high performance if the client is paying a large fee to get into the funds?

Steve: Our managed clients do not pay the loads. That’s one of the advantages of this program, one of the advantages of using us as your adviser. The reason is we’re participating in a “no-transaction-fee” mutual fund platform. So our clients can get access to many of the best mutual funds and to some of the most highly qualified portfolio managers. All with no load.

Martin: No fees?

Steve: No, I didn’t say that. We still charge our management fee. That’s the only way we get paid. But our annual fee is far less than the one-time loads you’d have to pay if you bought the fund shares directly yourself. Besides, the 46.5% cumulative performance from inception through June 30 is net of all fees.

Martin: Can you explain a bit more how it works?

Steve: In this program, I don’t pick individual stocks. I pick what I consider the best mutual funds with the best portfolio managers in the areas or sectors I like the best. They pick the individual stocks.

In other words, my role is to monitor and manage the managers. And for me, beating the so-called “benchmarks” isn’t enough.

Martin: Please elaborate.

Steve: I want positive performance. For example, a small-cap specialist could be beating all of his benchmarks for small caps and doing a great job of it. But if the whole small-cap sector is down, it’s no victory for the client.

The sector could be down, say, 30% and the manager could be down only 10%. So he’s beating his benchmark by 20 percentage points. That’s supposed to be “great.” But for the investor, it’s a defeat. Your goal should be to make money — not to lose less money.

Martin: Of course. Where can investors get more information?

Steve: Just give us a call at 800-814-3045. And before you do anything based on this e-mail, be sure to carefully read our important disclaimers.

Martin: OK. Please let us know when you see any major change — so we can talk about this again.

Views expressed by Steve Chapman in this interview are his solely.

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Just to let my readers know that Paul Barrs, the Australian Internet Business and Home Biz Master, has released a “Three Ways” to Home Business Success Audio eCourse that is free.  You can sign-up for it at this URL:  http://www.walletrelief.com/paul-barrs-home-business-success.  Enjoy!