Thursday, July 21, 2011

Cramer: Apple to $500 AAPL

Cramer on Wednesday raised his price target on Apple from $400 to $500 a share. Yet at the $500 level, the technology stock will be selling at just 11.5 times his estimates for next fiscal year's earnings, only three quarters of what the average company in the S&P 500 index sells for.

Apple's stock [AAPL 386.90 10.05 (+2.67%) ] rallied 10 points on Wednesday while the overall market did nothing, yet Cramer said stocks are still the best asset class to own. To make his case, he compared the United States versus the "United States of Apple or more appropriately, iUSA." This comparison shows why stocks should be owned, he said, especially as companies are doing everything right while the country's leaders are doing so many things wrong.

For starters, Cramer noted the U.S. is deeply in debt. If the U.S. wasn't such a large part of the world economy with a currency that has a legacy of being worth something, he thinks the International Monetary Fund would be knocking on the U.S.'s door at this rate of spending.

Apple, on the other hand, has $76 billion in cash and no debt to speak of, Cramer said. Some critics have actually complained that Apple should be putting its cash to work. Cramer thinks it made the right decision to keep its cash, though. After all, he doesn't think there have been any companies worth acquiring. He would, however, like to see Apple pay a dividend. Being as there are only 30 companies in the U.S. with a market capitalization larger than the cash position of Apple, some may argue it already has more than enough money saved for a rainy day, he argued.

So when it comes down to it, would you rather invest in a country that is deep in debt or a company that's prudent enough to say it will sit on its money until it finds a company worth buying? Cramer is going with the latter.

Next, Cramer compared U.S. leaders to Apple's management. For a long time, people thought of Apple as an one-man band, Cramer said. Many people thought Steve Jobs was the brains behind the operation and the one guy calling all of the shots. Since Jobs took a medical leave of absence last year, though, we've learned that Apple is culture full of great minds, who develop innovative products and give the customers what they want, Cramer said. Apple's management seems to encourage innovation and then nurtures it.

Meanwhile, Cramer asked what innovation has Washington fostered?

"Who the heck can even afford to innovate in that horrible atmosphere of rancor and anger where partisanship is the worst it's been since the Civil War," Cramer complained. "Oh, and let's face it, with the United States, the customer is always wrong, or at least the domestic customer, since we give money away left and right to unfriendly foreign regimes that a less diplomatic man than myself might call our enemies."

Cramer then discussed the balance of trade. Many companies and unions are complaining that we need more protection from trade partners overseas, he said. They want the government to help them sell more, but Apple is taking share left and right. It's destroying its competition around the world, he noted. Thanks to ingenuity, execution and brainpower, Apple is doing well in market after market.

Many Americans believe our best days are behind us, Cramer said. Nobody believes Apple's future isn't as bright as its past, though. He thinks Apple's future prospects are strong.

So what's the bottom line? To Cramer, Apple is a great example of why capitalism is worth cheering for. Unfortunately, Apple also puts U.S. leaders to shame because all they can do is bicker.

"The United States of Apple?" Cramer said, "Now that's a place Cramericans can call home."

Phony Default Crisis May Yield Bargains: T, PFE, PM, INTC, DBC

If the drama in Washington rattles markets, here's what investors should buy.

America is two weeks away from defaulting on its debt, dramatists in Washington say. Fortunately, this crisis is as phony as a million dollar bill, which is why Treasury bond prices have barely flinched, which in turn is why the players involved will mug for the crowd until the last possible moment before striking a deal.

That doesn't mean investors should shrug the whole thing off. As Monday's steep decline in the Dow Jones Industrial Average showed, fake crises can produce real losses for investors. They can also provide some excellent buying opportunities.

In brief, there are at least four reasons not to fear a U.S. default. First, the debt limit America breached in May and must raise by Aug. 2 is an artificial barrier created by Congress mostly so that its parties can scold each other every so often about having to expand it. They have done so 11 times since 1940 (and many more times through extending deadlines and stretching definitions). Second, world demand for U.S. Treasury bonds remains ample, with China, Japan and Britain raising their holdings of late.

Third, under the gloomier of two sets of long-term projections by the Congressional Budget Office, federal debt won't hit unprecedented levels relative to the size of the economy until at least 2025. Fourth, as I've noted before, the U.S. budget shortfall isn't nearly as worrisome as European ones because America overspends on health care and defense by preposterous margins, and can therefore extract vast spending cuts from a handful of painless reforms the moment it musters the political will.

Of course, the U.S. can't necessarily prevent a threatened downgrade of its credit rating by Standard & Poor's, Moody's or Fitch. But if the Treasury market is impressed with the opinions of those firms, it hasn't demonstrated it. The 30-year yield rose Monday, but the 10-year yield recently slipped below 3%. That's less than half its average in Fed data going back to the Korean War.

Such low rates make Treasury bonds unappealing at the moment, despite their credit safety. Corporate bonds look similarly overpriced but municipals are somewhat more attractive by comparison, with tax-free yields of 3.2% on 10-year, A-rated issues. Shares of large, multinational companies look cheap, meanwhile. The largest 5% of U.S. firms by stock market value trade at a modest 13 times this year's earnings forecast and carry an average dividend yield of around 3%—half again as high as the broader market's yield. AT&T (NYSE: T - News), Pfizer (PFE - News), Philip Morris International (NYSE: PM -News) and Intel (NASDAQ: INTC - News) pay an average of 4.3%.

Gold topped $1,600 an ounce Monday, up 8% since the start of July. It might gain more, but what gold can't do is provide its owners with income or any intrinsic justification for its price. Those are two sources of much-needed support when asset prices broadly fall. Investors who are keen to hold commodities should consider dabbling in a diversified basket of grains, energy and metals, like the PowerShares DB Commodity Index Tracking fund (DBC - News).

Among the best things to hold during a phony default crisis is cash. It pays next to nothing, but the dollar looks cheap relative to the euro based on purchasing power parity (a comparison of local costs) and if policy makers in coming days overplay their role and rattle foreign creditors, bonds might swoon and offer better yields, and shares might tumble in the U.S. and abroad. Long-term, however, all the breast-beating in Washington is a promising sign. It means law-makers are properly serious about the importance of deficit cuts. If the drama creates bargains in the near-term, here's hoping the results are worth it.

A Sell Signal for the Stock Market?

A big drop in the transportation sector killed hope for a Dow Theory buy signal.

As the month of July began, the stock market was in the midst of a rather significant rally and the Dow Jones Transportation Average broke out to all-time highs.

But within a few days, the good times turned to bad as this economically-sensitive sector crumbled.

On Monday, the Dow Jones Industrial Average lost 94 points, though the index was trading even lower earlier in the day.

The bears have apparently resumed control of the stock market and that keeps the market on track to challenge its previous 2011 lows one more time.

When the transports reached their new high recently, followers of the century-old Dow Theory suddenly got excited. The theory states that a major new high in both the Dow Industrials and the Dow Transports means the market is in sync and ready to move even higher.

Of course, the composition of the industrials index has changed drastically and we can argue that truckers and railroads have less to do with transporting products in a service and information-based economy than in the past. But even with such changes, Dow Theory has still been able to keep investors on the proper side of the market for many years.

So when the transports broke out earlier this month, Dow Theory followers were eagerly awaiting the same in the industrials. After all, the stock market was hot, interest rates were low and many commodities, which are input costs for many large-cap U.S. companies, had backed down from earlier highs.

However, it was not to be as the sector's mood changed abruptly. The iShares Dow Jones Transportation Average Index Fund (ticker: IYT) dropped sharply to form a second "gap" on the charts in as many days (see Chart 1).

Chart 1


A gap is simply a price zone where no trading takes place because the market is moving too quickly. Supply and demand become so far out of balance that prices must jump, rather than smoothly trend, to the next level.

The transports fund gapped up with heavy volume on July 7 as it moved through its April high. A technical breakout combined with a gap is normally a very bullish sign, if it holds its ground for a day or two without dropping back. Unfortunately, it did fall back. And making it worse was that the decline on July 8 was also a gap.

A gap up followed immediately by a gap down is called a "gap reversal" and as its name implies, the trend turns from up to down. The transportation sector has been in decline ever since.

Although not as dramatic as gap reversals, similar breakout failures are visible in railroad stocks such as Union Pacific (NYSE: UNP - News) and truckers such as Con-Way (NYSE: CNW - News). Both of these groups were in strong rising trends so technical problems here bode poorly for all transports.

Airline stocks are among the weakest in the transportation sector. Although thinly-traded, the Guggenheim Airline ETF (FAA) illustrates how the airlines group has fallen over the past eight months (see Chart 2).

Chart 2


It also shows a steep breakdown over the past week despite the general malaise in crude oil prices over the same span. Typically, airlines and oil move in opposite directions as fuel makes up a huge percentage of airline costs. That both are weak tells us there are other reasons why investors should avoid these stocks including a solid declining trend.

Shipping stocks are in even worse shape as the Guggenheim Shipping ETF (SEA) probes fresh 52-week lows (see Chart 3). While the ETF is also thinly-traded, the price trend is very clear. Investors see no reason to buy, even at what appears to be very low levels.

Chart 3


Aside from the potential for a Dow Theory buy signal snuffed out, the transportation sector is now in short-term decline. The Dow Jones Transportation Average itself could easily fall from current levels to reach its March low at roughly 4920.

At that point, we'll have to see how it reacts. If it cannot hold on there, forget a Dow Theory buy signal. A Dow Theory sell signal will then be on the table.

McAlvany Weekly Commentary

Infinite Investment Options Now Being Reduced to One – Gold

A Look At This Weeks Show:
- “Gold is not money,” says Bernanke. Tell that to the Chinese as gold tops $1,600.
- Bond markets indicating what the “New European Union” will look like after the shakeout.
- The conflict of statists and individual liberty that is at hand.

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Jim Rogers: Fed Will Launch QE3 by Q3

International investor Jim Rogers expects a third round of quantitative easing by the third quarter of this year.

The head of Rogers Holdings expects this will happen "in the fall or early next year,” Rogers told CNBC, as FT Adviser reported.

"It's the wrong thing to do but that's all they [US policymakers] know to do. They are not very smart people so you better own commodities," says Rogers.

"They will see things not getting better and will do what they do."

Jim Rogers
(Getty Images photo)
Rogers comments came after U.S. Federal Reserve chairman Ben Bernanke hinted the Fed might provide "additional policy support" should economic conditions warrant it, indicating that a third round of quantitative easing may be offered.

Commenting on the bond market, Rogers said "I have no idea what can cause the bond market to rally but I don't think it will rally any time soon."

"If the world economy gets better I will make a lot of money on commodities because of the shortages,” Rogers says.

"But if the world economy doesn't get better I'm probably going to make money on commodities too as they will print more money.” reports that Arjuna Mahendran, head of Asian investment strategy with HSBC Private Bank told CNBC-TV18, that a probable QE 3 will only shoot the elevated commodity prices further.

“We have seen in the last two instances of QE, it created bubbles in the commodity space, principally, in oil but also in gold and other metals,” Mahendran said.

Oil Service Stocks Showing Strength: CPE, CRZO, HK, OIH, SGY

Oil Service stocks have been quietly showing relative strength, and the recent buyout ofPetrohawk Energy Corporation Co (NYSE:HK) may be giving this group a shot in the arm. Often when there is a buyout, it will fuel more speculation in its sector as investors try to position themselves for another possible acquisition. It’s interesting that this group has been performing well, despite the fact that Oil has basically gone nowhere after a sharp pullback in May. If crude gains any strength, it would be another possible catalyst for this group.

The Service stocks as a whole are also showing an interesting pattern. The group as represented by the Merrill Lynch & Co., Inc. Oil Service HOLDRs (AMEX:OIH) ETF is rebounding after what appeared to be a breakdown in June. OIH had fallen under a consolidation in May on increased volume and after a failure to bounce near $155, headed even lower. However, it bounced sharply after the false breakdown, and appears to be completing a reverse Head and Shoulder’s pattern. The neckline is the prior resistance area near $155 which is starting to get breached. If OIH can hold above this level, it would likely trap a group of bears and act as a floor for the near future. (For more, see How To Trade the Head And Shoulders Pattern.)

One stock in this sector that has been showing good strength is Carrizo Oil & Gas, Inc.(NasdaqGS:CRZO). CRZO had been working on a base all year before finally clearing it in June. There are no signs of the market correction in this stock as it continued to set higher lows over the past several months. It is now pulling back for a retest of the breakout area and appears to have attracted buyers at this level. Traders should watch to see if CRZO can hold above its prior base.

Stone Energy Corporation Common
(NYSE:SGY) is another stock in the Oil Service sector that is worth monitoring. While it hasn’t cleared its base, it has cleared some resistance levels and appears to be headed for at least a retest of its 52-week highs near $36. It held critical support near $28 on several occasions without breaking and this would be the key level for traders to focus on as a line in the sand. (For related reading, seeMastering Short-Term Trading.)

A smaller stock in this group that could be headed higher is Callon Petroleum Company Common (NYSE:CPE). CPE had been correcting in a wedge since surging to a high just above $9 in February. It shed about 30% of its price in a few months before, finally turning sideways later in the summer. It recently cleared the wedge it had been bound to, and after trading in a tight range above the breakout point and its 50-day moving average, CPE could be ready to resume the prior trend.

While I am leery of the Oil stocks having a sustained rally with Crude Oil being stagnant, we are also headed into the heart of hurricane season and the summer driving season. If Oil gets a spike, it could spark more interest in this group. With many of these stocks already acting well, it could lead to some great trading opportunities. (For more on crude, see Contango Vs. Normal Backwardation.)

What's the Real Inflation Rate?

Let's take a brief detour from all the debt ceiling nonsense. I want you to visit any street corner on Main Street, USA and ask someone if the money in their wallet buys the same amount of stuff as it once did.

Not only will their response will be the fastest way of gauging true inflation, but it will belie the cozy figures the government via its media puppets has been feeding to you.

Inflation vs. Deflation

In debating inflation versus deflation, we must first ask a few pertinent questions: Can inflation occur during a deflationary cycle, or is this a contradictory statement? Does inflation and deflation happen independently of one another? The answer can be found by evaluating an abbreviated history of asset prices.

Over the past 20 years, the government's measure of inflation, the Consumer Price Index (CPI), has steadily increased, averaging a 2.5% growth rate. Since 2005, the CPI has maintained that Steady Eddie pace. Meanwhile, major asset classes like U.S. stocks (NYSEArca: VTI - News), residential real estate (NYSEArca: XHB - News) and commercial real estate (NYSEArca: ICF - News) have declined in value.

What does this prove?

First, it illustrates that not all asset classes move at the same velocity in whatever direction. (Doesn't this make a credible argument in favor of diversifying one's investments? Not interested? OK, go ahead and put all your money in Apple.) Second, the rising cost of medical services, food, rent, i.e. (inflation) can happen during a period of falling asset prices (deflation). And what about the deflationary forces of declining salaries and payrolls, while commodities prices (NYSEArca: DBC - News) marched steadily upward? Doesn't it show that deflation can occur within an inflationary cycle and vice-versa? For non-believers, the period of 2007-11 is enough proof.

Alternative Measures

While the CPI is the government's way of reporting headline inflation, it's hardly complete. Another way to gauge the real rate of inflation is by analyzing the U.S. dollar's buying power. Why is this a better reference point than CPI? It's because the destructive forces of inflation take places when a currency loses value. It causes a corresponding rise in the cost of everyday necessities.

Let's ask a few more questions for our army of armchair economists: What happens when a country expands its monetary base at a rate faster than its GDP? Does it devalue the existing money already in circulation? Don't the laws of supply and demand come into play? When there's lots of supply, doesn't it destroy demand and thereby cut the item's price?

What about the value of the U.S. dollar in gold (NYSEArca: IAU - News)? Over the past 35 years, the dollar's value in gold has steadily deteriorated. In 1975, you could buy one ounce of gold for $165. Today, that same $165 dollars buys you around one-tenth the ounce price of gold. Likewise, the dollar's buying power versus competing currencies like the Australian dollar (NYSEArca: FXA - News), euro (NYSEArca: FXE - News), and Canadian dollar (NYSEArca: FXC - News) has fallen.

Inflation and Your Wallet

Here's another disturbing question: Does the CPI measure your personal experience with changing prices? Not necessarily. It is important to understand that Bureau of Labor Statistics bases the market baskets and pricing procedures for the CPI-U and CPI-W populations on the experience of the relevant average household, not of any specific family or individual. For this reason, it's improbable that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.

For example, if you or your family spends a larger-than-average share of your budget on medical expenses, and medical care costs are increasing more rapidly than the cost of other items in the CPI market basket, your personal rate of inflation may exceed the increase in the CPI. Conversely, if you heat your home with solar energy, and fuel prices are rising more rapidly than other items, you may experience less inflation than the general population does. A national average reflects all the ups and downs of millions of individual price experiences. It seldom mirrors a particular consumer's experience.


At close glimpse, the U.S. government's CPI inflation is a sub-standard measure of true inflation. Likewise, other distorted views of inflation abound. The Federal Reserve projects inflation of less than 2% for each of the next three years! Try to remember that figure because it will likely come back to haunt Bernanke & Co. along with the rest of the country.

Even though the inflation rate is up, how come it's not being fully reflected in the government's CPI figures? Is it because the real inflation rate is higher than what's being projected? And if it is, how much higher is the true inflation rate than what's being reported? What are some ways to protect your financial well-being against these subtle forces? ETFguide's next Webinar titled, 'Inflation - How bad will it get?' will tell you.

As we've seen, inflation and deflation can happen during the same time period. It's not a question of one or the other, but rather both. And capitalizing on the next cycle, versus being a helpless victim, will separate the winners from the losers.

Investing for Those With Limited Money

When I write about investing, I generally try to make it applicable to a variety of people. Everyone's situation is different, but I like to offer advice that could potentially be helpful to anyone. So often, I will read or listen to something on investing and it seems to apply to people with lots of money. I really find this to be the case when the topic comes up about investing overseas. To buy real estate outside of your country and to set up a foreign bank account, you usually need a substantial amount of money to make it worth it.

The reality is that most people do not have a lot of money. Even the average middle class person living in the U.S. does not have a lot of money, particularly outside of real estate and retirement funds. So for this post, I would like to offer some advice for people with a real limited amount of money.

First, although I believe that price inflation will get worse due to the government's reckless policies of massive spending and massive debt, I think it is important to have some liquidity in the form of money. Whether it is cash, a checking account, a savings account, or whatever, it is important to have some money available for emergency expenses. If you don't have at least a couple of thousand dollars to your name, there is no point on reading up on investment advice unless it is just an interesting topic to you. Because if you don't have much money to your name, then investing it well won't make much of a difference.

If you have almost no money, you should not be worried about investing. You should be worried about increasing your income, paying down debt, and spending less.

If you have a little money saved up and don't know where to start, I have a couple of simple recommendations. First, you could buy one-ounce silver eagle coins. You can check with your local coin dealer or look on the internet. You can buy these on Ebay too. With the current price of silver, you should be able to buy a one ounce coin for just over $40.

My second recommendation, and perhaps better one, is something that I recommend for everyone to do if you can. If you have some extra space where you live, buy things that you need that don't spoil. You can buy certain grocery items like bottled water and canned foods. You can buy soap, toothpaste, shampoo, razor blades, toilet paper, kleenex, paper towels, etc. Make a list of things that you use. You obviously can't stock up on milk, but there are many things that you can buy that will last for a year or more.

When you go shopping, look for those particular things that are on sale. If it is "buy one get one free" or if there is any kind of a sale from the regular price, buy it. Buy enough to last you at least a couple of months or more.

When it comes to storage, be creative. Look in your closets and see if there is any room up high. You can always add some shelving. If you have limited space, then you might want to stock up on razor blades and toothpaste before you start buying bulkier items like paper towel.

So why do I recommend this strategy? Because things aren't going to get any cheaper. The Fed has tripled the monetary base in the last three years. There is potential for huge price inflation. If this analysis turns out to be wrong, then the worst case scenario is that you use up the items that you bought. As long as you aren't buying an electronic item, then there is a very good chance that the price of the product won't be any lower one year from now.

You can start this strategy by stocking up on some 100-watt light bulbs. Our limited, constitutional, federal government decided to ban these under the conservative presidency of George W. Bush. The ban will go into effect in less than 6 months.

What Happened to the Muni Bond Blowup?

Turn the clock back to late 2010, and all the talk in the investment community was about potential Armageddon in the municipal bond market. In December, analyst Meredith Whitney famously predicted a "sizable" number of defaults in the municipal bond sector, in the range of 50 to 100 that would result in losses of hundreds of billions of dollars for investors. Midway through 2011, not a single rated municipality has defaulted on its debt this year.

Municipal bonds, which are generally regarded as some of the safest investments available, are issued by states, municipalities, or counties, and are usually exempt from federal, state, and local taxes. Since 1970, there have only been 57 rated defaults, including three in 2010, according to Moody's Investors Service. The majority of those have come from outside the general obligation sector. (General obligation bonds are backed by the full faith and credit and unlimited taxing power of a particular municipality.) Most of the defaults were in non-essential sectors like healthcare and housing.

"We've seen a number of what we refer to as 'near misses,'" says Robert Kurtter, managing director in public finance at Moody's. "They will probably get a lot of press attention, but often they get resolved because of higher levels of government, typically the states."

Kurtter isn't ruling out defaults in 2011, but what he's predicting isn't anything close to "sizable." "We do think that there could be more defaults in the general government sector in 2011 and 2012--perhaps more than the very low number that there have been, but not widespread at all," he says.

That's because state and local governments are strapped. As the nearly $1 trillion federal stimulus program winds down, most states, unlike the federal government, must balance their budgets through spending cuts, tax hikes, or a combination of the two. "In our view, state and local governments continue to experience unprecedented fiscal stress," Kurtter says. "We've had negative outlooks on the state government sector and the local government sector for three years now."

For 10 consecutive quarters, ratings downgrades of U.S. public finance credits by Moody's have outnumbered upgrades, as of the second quarter of 2011. Of the 170 ratings changes in the second quarter, 127 were downgrades and 43 were upgrades. That's a downgrade-to-upgrade ratio of about 3 to 1. (The ratio peaked at almost 5 to 1 in the fourth quarter of 2010.) "It's the longest period of that trend that we have since we've been keeping such records," Kurtter says. "And we expect the pressure to continue."

Nervous retail investors have responded accordingly. Since November 2010 when the net outflows first began, investors pulled more than $42 billion from muni bond funds, according to Morningstar. (For comparison's sake, they invested nearly $95 billion in taxable bond funds over the same time period.) But after seven consecutive months of outflows, the trend may be reversing. Munis funds saw inflows of almost $1 billion in June. "The very dire default projections just haven't materialized," says Miriam Sjoblom, associate director of fund analysis at Morningstar. "The pressure of investors leaving the market has abated."

But plenty of risk still remains in the normally tranquil muni bond market. Last week, Moody's issued a warning about the effects of a default by the federal government on its debt, and the impact that could have on municipalities. Moody's said it was placing the U.S. government's debt rating on review for possible downgrade, adding: "This action has consequences for the ratings of municipal credits that are directly linked to the U.S. government or are otherwise vulnerable to sovereign risk." This warning affects about 7,000 different top-rated muni issues. Experts say there is still a very low probability that Congress will not pass the debt ceiling, but if the government actually defaulted on its debt, it's not clear what the impact would be for state and local governments.

Rob Williams, director of fixed-income research at Charles Schwab, says a ratings downgrade of the federal government wouldn't necessarily translate into massive muni defaults. "Most state and local governments' credit quality will stand on their own," Williams says. "I don't think there is a clear connection between the credit quality of state and local governments ... and what could happen if there is a change in the U.S. treasury rating." A downgrade would obviously send massive ripples throughout the bond market, but Williams says it could actually boost demand for munis as investors sell treasuries and look for other safe-haven assets.

Going forward, Sjoblom says, the worst may be over, but investors should still be prepared for more volatility than they've seen in the past. "This is the new environment that we're in after the financial crisis," Sjoblom says. "No one is under any illusions that there isn't credit risk in the muni market. There is credit risk in the muni market."

How Many Credit Cards Should You Have?

If you've ever spent your way into a massive pile of credit card debt, the answer might be "none!" But for everyone else, the answer probably doesn't come as easily.

According to the Federal Reserve Bank of Boston's 2009 Survey of Consumer Payment Choice (published April 7, 2011), 72.2% of consumers have a credit card. The average consumer who uses payment cards (a category that includes credit cards, debit cards and prepaid cards) has an average of 3.7 credit cards. Let's examine why you might want your own behavior to match these statistics, if it doesn't already.

Multiple Credit Cards and Your Credit Score Your credit score is probably of your major concerns about having multiple credit cards.

Having more than one credit card can actually help your credit score by making it easier to keep your debt utilization ratio low. If you have one credit card with a $2,000 credit limit and you charge an average of $1,800 a month to your card, your debt utilization ratio, or the amount of your available credit that you use, is 90%.

Where credit scores are concerned, a high debt utilization ratio will hurt you. It may not seem fair - if you just have one card and you pay it off in full and on time every month, why should you be penalized for using most of your credit limit? - but that's how the system works. To improve your credit score, you should avoid using more than 10-30% of your available credit per card at any given time, according to credit score expert Liz Pulliam Weston.

By spreading your $1,800 in purchases across several cards, it becomes much easier to keep your debt utilization ratio low. This ratio is just one of the factors that the FICO credit scoring model takes into account in the "amounts owed" component of your score, but this component makes up 30% of your credit score.

FICO cautions that opening accounts that you don't need just to increase your total available credit can backfire and lower your score. (Paying these rates can impact your disposable income and investment returns. For more, see Understanding Credit Card Interest.)

Different Cards, Different Benefits Having an array of credit cards can allow you to earn the maximum available rewards on every purchase you make with a credit card.

For example, you might have a Discover card to take advantage of its rotating 5% cash back categories so that in certain months, you can earn 5% back on purchases such as groceries, hotels, plane tickets, home improvements and gas. You might have another card that gives you 2% back on gas month in and month out; use this card during the nine months of the year when Discover isn't paying 5% cash back on gas. Finally, you might have a card that offers a flat 1% back on all purchases. This card is your default for any purchase where a higher reward isn't available. For example, you might be able to earn 5% on all clothing purchases in October, November and December with your Discover card; the rest of the year, when no special bonus was available, you would use the 1% cash back card.

Of course, you don't want to go overboard - if you have too many accounts, it's easy to forget a bill payment or even lose a card. The problems that can result from such an oversight will quickly ruin any savings you might have earned. (A decade before Mastercard or Visa existed, the first credit card company was introduced. For more, see How Credit Cards Built A Plastic Empire.)

Backup Sometimes a credit card company will freeze or cancel your card out of the blue if they detect potentially fraudulent activity or suspect that your account number might have been compromised. In a best-case scenario, you won't be able to use your card until you talk to the credit card company and confirm that you are, indeed, on vacation in China and your card has not been stolen. That's not a phone call you can make from the cash register, however, because you'll have to provide sensitive personal information to confirm your identity. You'll need another way to pay if you want to complete your purchase.

In a worst-case scenario, the company will issue you a new account number, and you'll be completely without that card for a few days until you receive your new card in the mail.

Another possibility is that you could lose a card or have one stolen. To prepare, you might want to have at least three cards: two that you carry with you and one that you store in a safe place at home. This way, you should always have at least one card that you can use.

Because of possibilities like these, it's a good idea to have at least two or three credit cards. If you only want to have one, make sure that you're always prepared with a backup payment method. (These cards offer convenience and security, but are they worth it? For more, see Prepaid "Credit" Cards: Convenience At A Cost.)

Emergency It would be best if you didn't have to use a credit card for an emergency - ideally, you'd have enough money in a liquid account like a savings account to use in such a situation. However, if you don't have the savings or if you want to have the option to not drain your savings unexpectedly, you might want to have one credit card that you set aside only for emergencies. Ideally, this card would have no annual fee, a high credit limit and a low interest rate.

The Bottom Line There are many benefits to having multiple credit cards, but only if you manage them correctly. To ensure that having several credit card accounts will work for you, not against you, be aware of the benefits each card offers, your credit limit on each one and your payment due dates. Use each card to your best advantage, and make sure to keep your balances low and pay them off in full and on time.