Thursday, February 7, 2013

Crisis Investing 101: 5 Assets That Could Save Your Portfolio

In the midst of today's raging bull market in stocks, it's hard to think about crisis investing. As stocks surge higher toward record territory, economic troubles are the furthest thing from most investors mind.
But it's during these good times that wise investors should prepare for a potential crisis.

Precious metals are not enough
Most investors equate crisis investing strictly with the buying of physical precious metals. These investors think that buying metals like gold and silver protects them against an extreme inflationary environment. They are not wrong. But because it's impossible to accurately predict the next crisis, diversification across multiple asset classes is your best bet to weather any economic storm.
The worst thing an investor can do in the face of an uncertain future is to build a portfolio that's too heavily weighted in only one asset class.
With this in mind, I built a list of five traditional and nontraditional asset classes every investor should hold in their "crisis-ready" portfolio. I will follow up with a series of five articles, digging deeper into each asset class and providing specific suggestions on how and why to add each one to a portfolio.
1. Gold and oil
These two commodities are traditional crisis investments. Gold has a strong historic precedent as a hedge against inflation, while oil stocks can be a hedge against civil unrest in politically volatile regions. In addition, the strong correlation between gold and oil can be seen in the chart below.
This relationship is the result of two economic forces. When oil increases in cost, it results in costlier goods and services across the board as transportation costs move higher. This increase in prices leads to inflation and, as we know, gold value increases in inflationary times. 
The second and less well-known correlation is government purchases of oil with gold. Iran is notorious for avoiding U.S. sanctions by trading billions of dollars in oil for similar amounts in Turkish gold. In a following article, I will address how investors can use this relationship to design a strong crisis portfolio.

2. Commodities
Agricultural commodities like soybeans, corn and wheat can play a vital role in a well-diversified crisis portfolio. Commodities tend to increase in tandem with inflation. However, should fear grip the economy, commodities can tumble just like the stock market.  

3. Real estate
It's easier to think of a crisis in the real estate sector today, than real estate as a crisis investment. The truth is everyone needs someplace to live. There is only so much available property, and wise purchases of real estate remains a core feature of successful investment portfolios. 
There are multiple ways to invest in real estate and profit from it -- even during a crisis. In fact, a crisis can be used as an opportune time to get into the market. 
I will delve deeper into the many ways real estate can be part of a diversified portfolio in an upcoming article in this series. 

4. Currencies, coins, bullion
These are three distinct assets but all three can be physically held. Currencies, as in the Forex market, are proven shelters in the storm depending on where and what type of crisis occurs. One example is the way the U.S. dollar served as a fortress of strength during the recent European crisis. Investors who held greenbacks during the euro zone banking crisis were handsomely rewarded. 
Bullion is another word for gold in its physical form. It tracks gold as an asset class, but is not exposed to broker risk as investors physically have possession of the asset
Coins, on the other hand, despite being similar to bullion, have additional numismatic value to dealers and collectors. I will provide guidance on how and why to diversify into currencies, coins and bullion in another article of this series. 

 Art, wine and other collectables
This section will delve into the nontraditional assets for crisis investing. Believe it or not, there are hedge funds that specialize in each of these three assets. They clearly add another layer of diversification on top of an already diversified crisis portfolio. 
Risks to Consider: There are many sharks in the crisis investing business. They prey on investors' fear about the future by pushing a one-size-fits-all investing idea that often pays them a high commission. Always be extremely cautious of anyone who insists diversification is not a key feature of a crisis portfolio.
Action to Take --> To really weather the storm -- and even profit -- during a crisis, investors should have a well-diversified portfolio. The five assets mentioned in this article are a solid starting point.

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Tips on Spotting Financial Fraud

Here’s an update to a post from last summer. Our old friend Russell Wasendof, Sr. was sentenced today to 50 years in prison for massive fraud. The following is our original post from August 17th:
For those of you who never got around to taking ancient Greek in college, the word of the day is hubris.

Webster’s dictionary, 8th ed.: “Excessive pride or self-confidence, often entailing a loss of contact with reality and an overestimation of one’s own capabilities, especially on the part of those in positions of power.”

That pretty much sums up the psychology behind the ongoing debacle that is Peregrine Financial, whose founder and CEO, Russell Wasendorf, Sr., was indicted in Cedar Rapids, Iowa, on Monday on 31 counts of lying to U.S. financial regulators.

By his own admission, Wasendorf bilked investors out of nearly $100 million over the course of nearly two decades (just days before his arrest, the National Futures Association reported a deficit of more than $200 million in funds that Peregrine Financial had claimed to be on deposit at U.S. Bank). To hide the theft, he cooked up fake bank statements using Photoshop, Microsoft Excel, and high-quality printers. These he then handed over to Peregrine’s CFO, who appears to have adopted an “OK, you’re the boss” attitude after Wasendorf used what he called “blunt authority” to cow him into submission. Wasendorf seems to have taken special pride in his forger’s art, bragging of how adept he eventually became at falsifying not just hard copies, but online statements as well, none of which the financial regulators appear to have questioned.  (more)

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Rick Rule – His Surprising & Remarkable Predictions For 2013

from KingWorldNews:
On the heels of more discussion about additional money printing by Japan, today one of the wealthiest and most street-smart pros in the business spoke with King World News about the reality of what is really taking place in key markets. Here is what Rick Rule, who is the CEO of Sprott USA, had to say: “We see strength in this market. The underlying commodities are fairly strong. I hope KWN readers have noticed that in the really, really depressed days of November and December, we spoke on King World News about the fact that after tax loss selling, the junior equity market was going to bounce back simply because the tax loss selling was abated.”
Rick Rule continues @

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Big Lots, Inc. (NYSE: BIG)

Big Lots, Inc., through its subsidiaries, operates as a broadline closeout retailer in the United States and Canada. The company offers products under various merchandising categories, such as consumables, including food, health and beauty, plastics, paper, chemical, and pet departments; furniture category comprising upholstery, mattresses, ready-to-assemble, and case goods departments; home category that consists of domestics, stationery, and home decorative departments; and seasonal category, which includes the lawn and garden, Christmas, summer, and other holiday departments. It also provides merchandise under the play n' wear category that comprise electronics, toys, jewelry, infant accessories, and apparel departments; and hardlines and other category, including appliances, tools, paint, and home maintenance departments. As of January 28, 2012, it operated 1,451 BIG LOTS stores in the 48 contiguous United States, and 82 LIQUIDATION WORLD and LW stores in Canada. The company also offers its products on wholesale basis. Big Lots, Inc. was founded in 1967 and is based in Columbus, Ohio.
Please take a look at the 1-year chart of BIG (Big Lots, Inc.) below with my added notations:
1-year chart of BIG (Big Lots, Inc.) BIG had been hitting a very important level of resistance at $32 (lt. blue) and had been stalling at that price since August. No matter what the market has or has not done over that period of time, BIG has not been able to break through that area of resistance, until last week. The stock should be moving higher overall and now, as expected, the stock seems to be finding support at the previous $32 resistance.
The Tale of the Tape: BIG broke through its key level of resistance at $32 and could be entered as a long trade on any pullbacks to that level. However, if the stock were to break back below $32, the forecast for a move higher would be negated.

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McAlvany Weekly Commentary

An Interview With Richard Duncan

About This Week’s Show: 
-Consequences of the Fiscal Cliff deal
-Currency war with Asia
-Bernankeism is debtism

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The Market's Highest-Yielding Pharma Stocks: PDLI, PMD, GSK,PETS, ABBV

Big pharmaceutical stocks have fallen out of favor, especially among investors seeking high-growth investments. Not only are these firms releasing fewer new blockbuster drugs, but the sector as a whole is seeing the headwinds from efforts to limit health care spending worldwide.
Still, the pharma sector has some phenomenal investment opportunities for dividend investors. Many of the industry giants -- Johnson & Johnson (NYSE: JNJ), Bristol Myers Squibb (NYSE: BMY) and Merck (NYSE: MRK), for example -- are paying 3-4% dividend yields, with some offering yields as high as 9%.
Of course, yield alone doesn't make a good investment. It's also important to consider the company's financial strength, and history of earnings and dividend growth.
Here is a look at the five top-yielding pharmaceutical companies and my top picks for investors seeking reliable dividend income. (more)

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Nearly Half Of American Families Live On The Edge Of Financial Ruin

In the past few years, Americans have learned a thing or two about how quickly disaster can strike.
And with each Hurricane Sandy, housing crisis, and stock market crash that rocks our world, we're faced with the realization that many of us simply aren't prepared for the worst.
A sobering new report by the  Corporation for Enterprise Development shows nearly half of U.S. households (132.1 million people) don't have enough savings to weather emergencies, or finance long-term needs like college tuition, health care and housing. 

According to the Assets & Opportunity Scorecard, these people wouldn't last three months if their income was suddenly depleted. More than 30 percent don't even have a savings account, and another 8 percent don't bank at all.
We're not just talking about people who living people the poverty line, either. Plenty of the middle class have joined the ranks of the "working poor," struggling right alongside families scraping by on food stamps and other forms of public assistance.
More than one-quarter of households earning $55,465-$90,000 annually have less than three months of savings.
And another quarter of households are considered net worth asset poor, "meaning that the few assets they have, such as a savings account or durable assets like a home, business or car, are overwhelmed by their debts," the study says.  (more)

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