Safe, inflation beating investments (especially for retirment age folks)

Not too long ago the whole world was worried about inflation. Prices at the pumps, food, and everything else. In a short 6 months, gas is at $40 per barrel, from $147. Jobs lost, American multi-nationals turning into governemnt owned companies, and Dow below 8000. Sure, inflation is no longer a worry, but now it's worst. At least with inflation people had jobs, they just had to change lifestyles. Now, with massive layoffs, people have no life, period.
In a way, inflation problems threaten what you could have; and recession (heck, maybe it's depression now), threaten what you have.

For the younger folks, there are opportunities in the future...maybe. But for those who are near retirment age, here's something to consider for safekeeping your money (maybe hiding it under the mattress may not be a bad idea).

These investments can help retirees.

Inflation-Beating Investments

1. Treasury-Inflation Protected Securities

How they work: TIPS protect against inflation through their connection to the Consumer Price Index. Specifically, TIPS' principal rises with inflation and falls during deflation. If someone buys $100,000 in TIPS and inflation increases by 3 percent, the TIPS principal will be worth $103,000 by the end of the year. (Adjustments are made every six months.) When TIPS mature, investors receive the original principal amount or one that's been adjusted, whichever is greater. TIPS pay interest every six months. This interest rate is constant, but the earnings fluctuate because they're based on the inflation-adjusted principal.

Who they're good for: Retirees, and anyone else living on a fixed income.

Cost: TIPS are sold directly from the U.S. Treasury Department in increments of $100. You also can purchase shares of mutual funds that primarily invest in TIPS, such as Harbor Real Return or Vanguard Inflation-Protected Securities.

Liquidity: TIPS are very liquid. You can sell them at any point in time, though there's no guarantee you'll make money: If you sell before the TIPS maturity date you incur a risk of selling at a premium or discount of what you've paid for it.

Pros: Inflation protection.

Cons: Taxes. Investors must pay ordinary income tax rates, which can be as high as 35 percent, for the interest they receive as well as for any increase in value in the TIPS principal. Experts recommend that TIPS be held in tax-sheltered accounts such as a 401(k) or an IRA.

Risk: The value of the principal can go down, so if you sell prior to maturity, you may get less than what you paid.

2. I Bonds

How they work: I bonds are designed to keep pace with rising prices by paying a composite interest rate that's made up of two parts: an underlying fixed rate and an inflation-adjusted variable rate. The variable interest portion is tied to the CPI rate and rises and falls during the life of the bond to keep pace with prices. The fixed rate portion remains unchanged for the life of the I bond. This rate changes semiannually, on May 1 and Nov. 1, for newly issued bonds. Currently, I bonds are paying a composite rate of 5.64 percent. On Nov. 1, the underlying fixed rate was set at 0.70 percent, and the semiannual inflation rate was set at 4.92 percent. These rates will change again on May 1.

Who they're good for: Retirees who already have a hefty nest egg and therefore don't need as much growth should look to I bonds.

Cost: I bonds can be purchased electronically in amounts of $25 or more, or for a minimum $50 for paper versions, from Uncle Sam at www.treasurydirect.gov.

Liquidity: Not good. You cannot redeem I bonds for 12 months, and if you sell before five years you'll forfeit interest from the three most recent months. To avoid penalties, you must wait five years to cash out.

Pros: Safety and inflation protection. Generally, bonds won't pay you the handsome returns of stocks, but the principal is guaranteed. They're also exempt from state and local taxes, and investors can defer what they owe in federal taxes until they cash them in.

Cons: Limited growth. Even though you beat inflation, I bonds generally won't have the kind of growth as riskier investments. Lack of liquidity is also a negative.

3. Dividend-Rich Stocks

How they work: As a rule, public companies either reinvest earnings or pass them along to shareholders as dividends. For beating inflation, the second variety is hard to beat: Dividend-rich stocks provide income, but unlike fixed-income investments, they have the potential for capital growth as well. Large, established stocks, such as those in the Standard & Poor's 500, have a greater likelihood of offering dividends. Those paying the highest dividends are generally found in such sectors as industrials, utilities, financial services, pharmaceuticals and consumer staples.

Who they're good for: Most retirees need the potential growth of equities, whether they pay dividends or not. But as seniors leave the work force, the added bonus of dividends is a smart choice for individuals who will need assets that provide both growth and income.

Cost: Share prices vary depending on the company and market conditions. A commission is involved with the purchase of stocks, whether you purchase through a full-service brokerage firm or you're a self-directed investor. Costs will be lower for the latter type of firm. If you buy a diversified mutual fund that focuses on dividend-rich stocks, you'll pay an expense ratio.

Liquidity: Very liquid, in theory. You can buy or sell any dividend-paying equities at any time. However, to reap lower tax benefits, you must own equities for a certain amount of time -- generally more than 60 days in a 121-day period surrounding the so-called ex-dividend date, which is the day after shareholders who are entitled to a dividend are identified.

Pros: Low taxes -- for now. Until 2010, qualified dividends are subject to capital gains taxes, which are no higher than 15 percent for individuals in tax brackets 25 percent or higher. (Individuals in lower tax brackets owe no tax on dividends starting in 2008 until Jan. 1, 2011.)

Cons: Besides the potential for capital loss, these stocks generally lack diversity. Dividend-paying stocks, or funds that invest in them, tend to concentrate on a few industries that aren't known for rapid growth.

Risk: Equities can lose money, so buying dividend-rich stocks requires homework.

4. Exchange-traded funds, or ETFs

How they work: ETFs have qualities of both stocks and funds. Though they comprise a basket of securities, they're traded like a stock, so prices vary throughout the day. But like mutual funds, ETFs can be include equities, bonds, commodities, currencies, derivatives, etc. ETFs are generally designed to mirror indexes, but that's not always so. Demand for ETFs is fueling rapid growth in their offerings. It's possible for inflation-leery individuals to find ETFs invested in high-growth stocks or dividend-rich equities.

Who they're good for: Relatively low management costs and tax efficiency make ETFs better for budget-minded retirees who are looking to invest a sum of money for years instead of weeks or months, and who may be seeking to diversify assets. They also offer a convenient, no-fuss alternative to individual securities because it's relatively easy to pick one off the shelf and plug it into a portfolio.

Price: Varies throughout the day. Commissions are charged with purchases and sales.

Liquidity: Very liquid. You can trade ETFs as frequently as you want, just as with stocks. You can place limit orders on them, short them, buy them on margin.

Pros: Low management costs and rich yields. Because most ETFs are not actively run by a manager, ETFs are generally cheaper than mutual funds.

Cons: Transaction fees. Investors must pay commissions every time they trade an ETF, so they can wind up being pricey for active traders. And dividends that are reinvested in an ETF can be subject to brokerage commissions, too.

Tax efficiency: Generally, underlying assets in an ETF are pegged to an index, so they're not traded as frequently as an actively managed mutual fund. And ETFs usually don't make large capital gain distributions to investors either, keeping taxes in check.

Risk: An ETF's market price may skew widely from its net asset value. Though it's uncommon, investors need to be aware this adds a certain level of uncertainty. ETFs are often made up of a pool of assets in a narrowly defined index or in a particular sector. That concentration can increase the risk for price declines more than actively managed funds, which tend to have more diversification.

5. Mutual Funds

How they work: Funds can be made up of a variety of underlying assets including stocks, fixed income, currencies, commodities and cash as well as a combination of these, depending on the style you choose.

A new breed of "retirement-income funds" is geared to nonworking seniors who want their assets to last for a specific number of years and keep up with inflation.

Who they're good for: For seniors looking to inflation protection or additional income, a mutual fund can provide more diversity for their investment dollar than purchasing, say, a single TIPS or dividend-yielding stock. Seniors who plan on a long retirement and who need to generate money after they leave the work force, on the other hand, may also want to consider equity-based funds designed for growth.

Cost: Prices and ongoing expenses vary. Actively managed funds are almost always more expensive than index funds.

Liquidity: If you own load funds, you may trigger front-end, back-end, deferred or other redemption fees when you sell. A short-term redemption fee, for example, is imposed on individuals who sell their fund shares within a certain amount of time, typically 30 to 60 days.

Pros: Mutual funds are diversified and run by professional managers, eliminating worry for individuals who don't have the time, expertise or desire to manage their investments themselves. This is particularly true with so-called target-date funds that automatically readjust holdings to become more conservative as investors approach retirement. Funds invested in equities have the potential to keep pace with or surpass inflation, depending on their underlying assets and performance.

Cons: Expense. Ongoing management fees can make mutual funds pricy to trade, though some index funds run very cheap. Generally, fees eat into investors' profits because they're deducted from fund assets. Actively managed funds with high turnover may generate high taxes.

Risk: Capital depreciation. Mutual funds come with no guarantees and may lose money, depending on the performance of their assets.

破紀錄的一年！從雲端墜入地獄的2008年

2008年真是詭譎多變的一年！從年初全球貴金屬、原物料、大宗物資價格屢創歷史新高，榮景泡沫堆到最高；其後卻急轉直下，因美國次級房貸引爆全球股市劇烈波動，金融海嘯影響所及，經濟成長趨疲、企業獲利大減、實質所得減少、投資意願低落、人民失業……從國家財政、企業，到個人，危機如骨牌般環環相扣，破滅的泡沫，幾乎淹到了所有人，這一年所發生的事在在改變了人類歷史，以人們有限的經驗幾乎可說措手不及

已開發國家38年來首度集體衰退： OECD 30個會員國的 GDP在2009年可能下滑0.3%，這也是1970年有紀錄至今，首次出現整體的負成長。

全球貿易27年來首次下滑：世界銀行行長Robert Zoellick 指出，今年全球貿易可能是27年來首次出現下滑，並為貿易融資帶來巨大缺口。

史上最高的美國年度財政赤字：根據美國財政部的資料，在 9月30日結束的2008年財政年度，美國財政赤字高達4550億美元，創下歷史最高紀錄。

外國央行所持美國國債規模創歷史新高：截至11月12日，外國央行持有的美國國債規模創下歷史新高。紐約聯邦儲備銀行公布的數據顯示，由 Fed所託管的海外官方帳戶中的美國國債達到 1.6兆美元。

全球六大央行同步降息：美國聯準會 (Fed)聯合歐洲重要央行於10月 8日史無前例地聯合行動，同步降息 0.5個百分點。自去年金融風暴以來， Fed在短短一年內大砍基準利率4.25個百分點，目前已降至1%，如此快速的降息速度，也意味著當前經濟狀況十分嚴竣。

7000億美國紓困方案帶動全球政府救市：為拯救金融市場，美國國會通過7000億美元的紓困配套方案，除了向陷入困境的大型金融業者伸出援手，也用於支援信用卡業，紓緩消費信貸壓力。這項7000億的巨額救市方案，是美國 GDP的5%，相當於台灣一年的 GDP總值。

油價10月創25年最大跌幅：國際油價自今年 7月初創下每桶147.27美元的歷史新高後，就一路跌至60元以下的低位，其中僅在10月當月就下跌了 32%，創國際原油期貨市場建立25年來最大單月跌幅。

BDI 指數半年內重挫逼近歷史低位：反映世界經濟景氣的 BDI指數，於10月11日收於 818點，而在今年 5月20日， BDI指數才曾創下 11793點的新高，11月下挫至 820點附近，相較半年前重挫逾93%。

美國製造業訂單最大跌幅：美國公布的 9月份工廠訂單月比 8月份下降2.5%，造成運輸業以外的製造業訂單創下歷史最大跌幅，也顯示美國工業部門活動加速下滑。

通用汽車股價創59年新低：美國最大車廠通用汽車股價今年來跌了 9成，11月10日跌至1946年以來的59年新低。

美國10月零售額史上最大降幅：根據美國商務部公布的10月份零售額，連續第 4個月出現下滑，幅度更是大降2.8%，創下了自1992年開始編制該數據以來的歷史最大降幅。

全球失業人口創10年新高：聯合國國際勞工組織估計，全球金融危機至少將造成2000萬人失業，在2009年底，全球總失業人口將達 2.1億人，是10年來首度超過 2億人的紀錄。

從雲端墜入地獄的2008年~

Stunning~

My current job since July has me flying every week. I sometimes feel like a pilot more than a private banker, and I apologize for not keeping up with the posts. However, this week's event in global secruity market, demands a blog on this issue.

Stunning is a word that sums up this week's action. It fits because it can be used in proper context for all parties involved in the capital markets, regardless of whether they held short or long positions.

The behavior of stocks? Stunning. The behavior of Treasuries? Stunning. The behavior of commodities? Stunning. The behavior of currencies? Stunning. The behavior of the government? Stunning.

Recounting all that transpired with sufficient detail would make this wrap a rival to War and Peace in length. Accordingly, I'll spare you the nitty-gritty and will focus on the larger happenings.

To begin, the week began with a washout of sorts as the market dropped 4.7% in the wake of reports that investment bank Lehman Bros. was filing for bankruptcy, that Merrill Lynch (MER) agreed to sell itself to Bank of America (BAC) in a hastily arranged transaction, and that insurer AIG (AIG) might be headed for bankruptcy if it couldn't raise a large amount of capital in a hurry.

The focus on the financial sector on Monday was apropos since the Wall Street universe revolved all week around that area, which was both a black hole and shining star depending on the day, or even the hour, one looked at it.

All other developments, like a warning from Dell (DELL) about slowing demand, a disappointing earnings report from Best Buy (BBY), a reassuring report on consumer inflation, and a decision by the FOMC to leave the fed funds rate unchanged, were a distant second to the behavior of the financial sector and the credit market, which were inextricably linked.

After recouping a portion of Monday's losses on Tuesday, the market suffered another seizure Wednesday, dropping 4.7% in the wake of news the Fed agreed to a 2-year, $85 billion secured loan for AIG. Although that loan was structured on very attractive terms for the Fed, the major concern for the market Wednesday was that it failed to do anything to put the credit market at ease since it didn't fix the underlying problem.

Strikingly, the TED spread, which is a barometer of credit risk and is the difference between the 3-month Libor rate and the 3-month T-bill rate, blew out to 302 basis points. That level compared to a 135 basis point spread the preceding Friday and marked the widest spread since just before the stock market crash in 1987.

Other credit spreads also widened considerably, particularly the spreads on credit default swaps for investment banks Morgan Stanley (MS) and Goldman Sachs (GS). That widening reflected heightened anxiety about their ability to repay their debt which, in turn, reflected a pressing concern that those firms were at risk of going the way of Bear Stearns and Lehman Bros.

From their close last Friday to their lows for the week, the stocks of Morgan Stanley and Goldman Sachs plummeted 69% and 44%, respectively. Remarkably, that move occurred despite both firms posting better than expected fiscal third quarter earnings results.

Their losses were indicative of some of the panic selling that took place during the week as participants fretted about the government's inability to stem a collapse in the financial system (more on this in just a bit). That selling was exacerbated, too, by reports that the value of the Reserve Primary Fund, which is a money market fund, broke below $1.00 per share, an extremely rare happening for a money market fund.

The confluence of the disconcerting headlines surrounding the financial sector precipitated a massive flight-to-safety bid in gold and the U.S. Treasury market.

At their high on Thursday, gold futures were up $161.50, or 21.1%, from their close last Friday. Meanwhile, the yield on the 3-month T-bill hit 0.02% on Wednesday, marking a 149 basis point drop from where it went out last Friday.

The fear in the market was palpable. For traders it manifested itself in the VIX Index, commonly referred to as the fear gauge, which hit its highest level in six years Thursday.

Thursday and Friday, frankly, were two days for the trading ages.

Thursday began well enough as stocks initially reacted favorably to reports of a coordinated effort among central banks to inject more dollars into the global financial system. Those good feelings proved to be fleeting. Stocks rolled over upon seeing there had been no real improvement in the credit market and upon hearing more worrisome headlines about money market funds.

In an instant, though, the tone of the market again changed in favor of the bulls when the U.K. announced a temporary ban on the short-selling of financial stocks.

Sensing that the SEC might follow suit in the U.S., a short-covering rally ensued. However, it wasn't until a report late in the day that Treasury Secretary Paulson was entertaining the idea of a financial system fix equivalent to the Resolution Trust Corporation solution used during the S&L crisis that stocks really took off.

From its low on Thursday to its close, the S&P surged 6.4%.

Sure enough, Friday brought a tidal wave of news regarding government proposals to return stability to the financial system.

In particular, the SEC banned short-selling of 799 financial stocks until Oct. 2 and the Treasury provided a guaranty program for money market mutual funds. The big game changer, though, was a proposal put forth to have the government (er, the tax payer) take the illiquid mortgage assets off the balance sheets of financial companies.

Administrative officials and Congressional leaders intend to work over the weekend to iron out specific details of the plan, but it was clear in Friday's session that participants liked the implications of what was being discussed since it got to the heart of implementing a comprehensive and targeted solution to fixing the root of the financial system's problems, which is housing and mortgage-related assets.

By implementing a program that removes the illiquid assets from the balance sheet of the financial companies, the government is literally buying the time that is necessary to turn the illiquid assets into liquid assets again through a more rational price discovery process.

The cost of the program won't be cheap. Secretary Paulson estimates it will run into "the hundreds of billions of dollars" since it has to be sufficiently large to have a maximum impact. However, the cost entails buying actual assets which can deliver cash flow, possibly in excess of the amount of the price the government will pay.

Time will tell, but the thinking that this plan can succeed in stabilizing the financial system and the housing market translated into heavy buying interest Friday. In fact, Friday's session, which also happened to be a quarterly options expiration day, saw the most volume (2.98 bln shares) ever traded at the NYSE.

For some perspective on the magnitude of the rebound over the final two days, consider the following: from their low on Thursday to their high on Friday, the Dow, Nasdaq, S&P 500, Russell 2000 and S&P 400 Midcap Index surged 9.8%, 12.0%, 11.6%, 13.2% and 12.0%, respectively. As an aside, the stocks of Morgan Stanley and Goldman Sachs rebounded as much as 189% and 69%, respectively, from trough to peak.

If two lessons are to be learned by investors from this week's action, it is that panic selling isn't a recommended portfolio management strategy and that you can't try to time the market. Neither works in the ongoing effort to build long-term wealth by investing in the stock market.

Surviving the down market and coming out as the winner

A Case Study: 2000-2002 Bear Market
Consider the bear market that occurred between the spring of 2000 and the fall of 2002, often referred to as the "tech bubble" or dotcom bubble. As the monikers suggest, the problems in this market began with technology stocks, as evidenced by the more than 60% drop in the tech-laden Nasdaq index. But weakness in a few sectors quickly spread, eventually dragging down all corners of the equity map. Even the blue-chip Dow Jones Industrial Average (DJIA) fell over 25% during the period.

Leading up to the year 2000, the explosion of the internet led to dramatic innovations in all areas of technology, including data servers, personal computers, software and broadband transmission systems like fiber optics and cable. By the late 1990s, any company remotely involved in the internet had a sky-high market cap, giving it access to very cheap capital. Stocks with little or no earnings were suddenly worth billions, and used their stock currency to buy other companies, obtain bank credit and expand operations.

Meanwhile, non-tech based companies felt the need to get caught up technologically, and spent billions on equipment as well as activities related to "Y2K" preparation, further inflating demand for tech products, but it was an artificial demand that could not be supported over time.

The Snowball Effect
As always happens near the peak of a bubble or bull market, confidence turned to hubris, and stock valuations got well above historical norms. Some analysts even felt the internet was enough of a paradigm shift that traditional methods of valuing stocks could be thrown out altogether. But this was certainly not the case, and the first evidence came from the companies that had been some of the darlings of the stock race upward – the large suppliers of internet trafficking equipment, such as fiber optic cabling, routers and server hardware. After rising meteorically, sales began to fall sharply by 2000, and this sales drought was then felt by those companies' suppliers, and so on across the supply chain.
Pretty soon the corporate customers realized that they had all the technology equipment they needed, and the big orders stopped coming in. A massive glut of production capacity and inventory had been created, so prices dropped hard and fast. In the end, many companies that were worth billions as little as three years earlier went belly-up, never having earned more than a few million dollars in revenue.

The only thing that allowed the market to recover from bear territory was when all that excess capacity and supply got either written off the books, or eaten up by true demand growth. This finally showed up in the growth of net earnings for the core technology suppliers in late 2002, right around when the broad market indexes finally resumed their historical upward trend.

Start Looking at the Macro Data
Some people follow specific pieces of macroeconomic data, such as gross domestic product (GDP) or the recent unemployment figure, but more important are what the numbers can tell us about the current state of affairs. Bear markets are largely driven by negative expectations, so it stands to reason that it won't turn around until expectations are more positive than negative. For most investors - especially the large institutional ones, which control trillions of investment dollars - positive expectations are most driven by the anticipation of strong GDP growth, low inflation and low unemployment. So if these types of economic indicators have been reporting weak for several quarters, a turnaround or a reversal of the trend could have a big effect on perceptions. A more in-depth study of these economic indicators will teach you which ones affect the markets a lot, or which ones may be smaller in scope but apply more to your own investments.

Position Yourself For the Future
You may find yourself at your most weary and battle-scarred at the tail end of the bear market, when prices have stabilized to the downside and positive signs of growth or reform can be seen throughout the market.

This is the time to shed your fear and start dipping your toes back into the markets, rotating your way back into sectors or industries that you had shied away from. Before jumping back to your old favorite stocks, look closely to see how well they navigated the downturn; make sure their end markets are still strong and that management is proving responsive to market events.

Parting Thoughts
Bear markets are inevitable, but so are their recoveries. If you have to suffer through the misfortune of investing through one, give yourself the gift of learning everything you can about the markets, as well as your own temperament, biases and strengths. It will pay off down the road, because another bear market is always on the horizon. Don't be afraid to chart your own course, despite what the mass media outlets say. Most of them are in the business of telling you how things are today, but investors have time frames of 5, 15 or even 50 years from now, and how they finish the race is much more important than the day-to-day machinations of the market.

Truth be told, there are no safe sectors of the market now. Even the darling of recent couple years, Energey, is due for a correction due to mounting political and economic pressures. The safe play right now would be to buy index funds that track either the Dow or Nasdaq. Try the Ultra ETFs such as DDM or QLD, they return twice as fast as the index returns. Unless U.S. slips into a depression, which is very unlikely, investing in the Dow or Nasdaq index now should see a profit in a quarter or two.

Wait for the correction, then step on the gas pedal

To give you an idea in an anecdote, back in 2001, the executives running Australian mining giant BHP Billiton sensed that China's economic growth was gaining critical mass. So they commissioned a study on how the country's rapid industrialization might affect the global markets for copper, coal, iron ore, oil - all the stuff that the company pulls out of the earth and sells.

"The results were quite - well, 'outrageous' is probably the right word," CFO Alex Vanselow told me when I visited BHP's headquarters in Melbourne a few months back. "Because we didn't believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous."

But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China's billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India's potential for growth - and its own billion-plus population - the numbers got even more extraordinary. And when they factored in the industry's inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.

Today, of course, the commodities boom that the BHP study anticipated is in full swing - and impossible to ignore. You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you're paying 20% more for that box of pasta than you were a year ago.

As painful as all those rising prices can be for consumers, the bull market in raw materials has proved to be an awesome investment opportunity. Over the past five years the S&P 500 has had a total return of 59%. But over the same period, the diversified Dow Jones-AIG Commodity index has risen some 110%, and the S&P GSCI Commodity index, another broad measure, has jumped 141%. The price of gold has more than doubled, and crude oil and copper have soared more than fourfold. If you were prescient enough to go long on rice on New Year's Day, you've already seen a return of 33% this year. And don't you think you should take some profits in this run, when the commodities prices are taking from your paycheck already at gas pumps and groceries?

No wonder, then, that money is flooding into resource markets. According to Gresham Investment Management, institutional investors like pension funds and endowments had $175 billion in commodities at the end of 2007, up from $18 billion in 2003. Just as predictably, Wall Street has rushed out a flurry of new products geared toward individual investors.

But unless you happen to have a degree in mining and a cousin who works at the Chicago Mercantile Exchange, the idea of putting some of your precious retirement savings into commodities right now probably seems pretty risky. Isn't it too late? Aren't these markets way too volatile for investors planning for retirement anyway? And isn't investing in commodities too complicated for average investors? In short, the answers to those questions are: probably not, no, and no.

Let's start with the biggest, scariest question: Is the commodities boom now like Cisco stock in 2000 or Miami Beach condos in 2006 - i.e., a bubble?

Some of Wall Street's big brains seem to think so. In recent weeks strategists at Lehman Brothers, Citigroup, and Brown Brothers Harriman, among others, have volunteered the B-word and warned of a painful sell-off. The surging price of oil has prompted particular handwringing.

One enlightened observer who's not worried about a commodities collapse is Jim Rogers. The maverick investor, author, and one-time partner of George Soros famously predicted the bull market in hard assets back in the late 1990s and began putting his money in resources when most of us were still enthralled by the dot-coms. According to Rogers, the current highs may represent a market top, but hardly the peak.

"The bull market still has a long way to go," says Rogers. "Is it time for a short-term correction? I have no idea. And even if we are due for a pullback, that's not necessarily true for all commodities. Oil might be ready for a shock, but that doesn't mean that zinc is." (The price of zinc has, in fact, fallen by half over the past year because of a glut. Rogers says he's monitoring industrial metals for the right moment to buy more.)

History is on Rogers's side. As he likes to point out, research shows that over the past 140 years the typical commodities bull market has lasted about 18 years. Rogers calculates that the current boom kicked off in early 1999, which means that if it conforms to precedent, we have almost another decade left.

Even if you believe that most of the easy gains have already been gotten, there are other reasons for adding commodities to your portfolio. For starters, studies show that the performance of commodities as an asset class has very low correlation to stocks and bonds. That means that when stocks are up, commodities tend to be down. And vice versa. "You have to be prepared for bumps on the way," says Karen Dolan, director of fund analysis at Morningstar. "Commodities can be volatile, but adding them to a portfolio can actually reduce overall volatility."

A second important reason to add commodities to your investment mix - one that's especially relevant to those approaching retirement age - is to offset inflation. "As an investor you are exposed to a variety of risks," says Don Coxe, global portfolio strategist at BMO Capital Markets and another commodities bull. "If you own agriculture and oil, then you put in a built-in hedge for yourself because you're now somewhat independent of rising food and fuel prices."

For both of those reasons a growing number of financial planners and money managers are following the lead of institutional investors and spicing up traditional stock and bond recipes by putting 5% or 10% of a portfolio in commodities. "I think there's a new wave," says Tom Lydon, a financial advisor whose Global Trends Investments in Newport Beach, Calif., manages $75 million. "It's not overly aggressive to propose a 10% allocation at this point."

How do you begin? One way to get exposure, of course, is to invest either in mutual funds that focus on stocks of miners like BHP and energy companies like ExxonMobil, or to invest directly in the companies themselves. If you pick the right fund or stock, it can work out great. But because resource stocks are affected by the direction of the broader market, you lose the advantage of not being correlated with equities. During the past year, for instance, Exxon's stock rose less than 5%, while the price of oil doubled. From a portfolio-planning standpoint, it would be better to put your money directly into the hard assets themselves.

Luckily, this is one case in which Wall Street's marketing zeal works in favor of the individual investor. In the past couple of years dozens of new products have appeared that track both broad commodities indexes and narrower slices of the resource world. The main vehicles are exchange-traded funds. ETFs, as they're known, are funds that track indexes but trade like stocks. "It's very easy to build a well-rounded portfolio with just two or three ETFs," says Lydon, who also runs the website ETFTrends.com.

You can start with a single fund that tracks a basket of various commodities. For a basic foundation, Lydon recommends the PowerShares DB Commodity Index Tracking fund, an ETF that is pegged to the Deutsche Bank Liquid Commodity index. There are also exchange-traded securities that track the energy-heavy S&P GSCI Commodity index, the less concentrated Dow Jones-AIG Commodity index, and the wide-ranging Rogers International Commodity index.

Some of these products are structured in the form of Wall Street's newest fad: the exchange-traded note. Like their ETF cousins, ETNs can be bought and sold freely like stocks. But they are actually long-term debt securities. Essentially, when you buy an ETN you are lending your money to the issuing financial institution in return for a promise that it will pay you the equivalent of the return of a given index. One potential downside is that you are taking on the credit risk of the issuer. (So, for instance, you might want to wait a little while before buying the new Opta ETNs from Lehman Brothers, given questions about the bank's liquidity.) But most experts regard them as a safe and relatively efficient way to invest in basic indexes.

If you're looking for a more specific commodities bet with big upside, the best place to invest right now, say many observers, is agriculture. While the prices of corn, rice, and wheat have spiked recently - and food shortages have sparked rioting in Egypt and other countries - they have only just begun to catch up with the rest of the resources world.

Over the past five years the Dow Jones-AIG agriculture index is up 33%, vs. 59% for the Dow Jones-AIG energy index, for instance. But grain reserves worldwide are at lows not seen for decades. And new strain is causing increased volatility. Earlier this year the price of wheat shot up 61% before correcting. Again, the main driver is Asia's economic growth. "Billions of people are changing the way they eat, adding protein and calories to their diets," says analyst Sean Brodrick of Weiss Research. "That's a demand story you just can't shrug off. We need bumper crops to keep up with what people are eating now." If you're interested in adding some fiber to your portfolio, check out a pair of securities with comically unwieldy names: the iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN and the Elements Linked to Rogers International Commodity Index-Agriculture ETN.

Strategist Coxe of BMO Capital Markets is also bullish on an old commodities standby: gold. He sees it as a further hedge against both currency risk and the ongoing financial contagion on Wall Street. When investors panic about the prospects of banks, gold - a.k.a. "the one true currency" - tends to rise.

But investors might also investigate another precious metal: silver. Whereas gold touched new all-time highs above $1,000 an ounce earlier this year before pulling back, silver remains 60% below its 1980 record price of $44 an ounce, even after more than tripling over the past five years. Plus, potential new industrial uses for silver in cutting-edge batteries and nanotechnology could add to demand. The two-year-old iShares Silver Trust ETF makes it easy to add the metal to your portfolio, but, like many other ETFs, there is an annual management fee. This might be one commodities play where it pays to keep it old-school and buy some coins.

Conservative Plays

I've been dismayed lately, as many of us have been, by the low interest rates we're getting on our CDs and savings accounts in the U.S. If we are retired or approaching retirement, we may be especially upset by these low rates.
Fortunately, we have options. Even in today's low interest rate environment, many stocks and funds offer attractive dividend yields. Especially the emerging market high yield funds, comprising of both bonds and stocks, seems to be a better bet than staying within U.S. confines.

I would never advocate putting all of your eggs in any one of them, but rather to spread around a good chunk of your savings in these assets if you need current yield. As discovered by my pal Phil DeMuth, and often utilized in his rapidly growing client base at Conservative Wealth Management, here are a few options for high current yield with safety.

The iShares Lehman Aggregate Bond (AGG) exchange traded fund (ETF) largely owns bonds of investment grade and steers well clear of the subprime mess. Experts are expecting more defaults on bonds through next year, but the default rate lately has hovered at or close to zero so even a jump will not significantly affect a large mix of bonds. AGG's trailing twelve month yield (TTMY) is 4.8%. (Note: The trailing twelve month yield, used throughout this column, is not the same as the current yield. As the price fluctuates, the yield changes even if the dividend stays constant or rises. Check with Yahoo! Finance for the latest yield figures.)

The Cohen & Steers Dividend Majors (DVM) ETF is comprised of many high yielding real estate investment trusts (REITs). As any reader of this space knows, I love REITs for their yields. Yes, I know they took a huge drop last year. But that only increased their yield. They are recovering now and so the yield is falling. But the trailing twelve month yield is 6.5% and that looks good enough to eat.

BlackRock Global Energy and Resources (BGR) holds high yielding energy stocks from all over the globe. I happen to think oil prices are in a bubble (I could well be wrong). But even if they are, with a yield like 8.7%, BGR could lower its dividend and still be doing fine.

Templeton Emerging Markets Income (TEI) contains bonds of emerging markets. These bonds are often issued by nations that are in better economic shape than the US is right now by virtue of running budget surpluses and trade surpluses. With a yield of 9.1% it's good enough for me and own it I do.

Black Rock Dividend Achievers (BDV) is comprised of high dividend stocks. It has an amazing yield of 6.9% and while its price will fluctuate like mad as markets move, its yield is positively mouth watering.

Great Northern Iron Ore (GNI) mines, well, iron ore, in Northern Minnesota. Its 6.9% dividend rate tells us that world demand for iron ore remains robust.

BP Prudhoe Bay Royalty Trust (BPT) pays you a royalty on the oil taken from a series of oil fields near Prudhoe Bay. Its yield for the past 12 months was a stunning 10.4%. As the price of oil rises, it could do even better but might not as a ratio of price.

Bank of America (BAC), the nation's second largest bank, has been stung by sub-prime and other poor investments. It's possible that it will cut its lofty 7.1% dividend, so if you are really, really cautious, you might wish to stay away. Even if it were cut by 20%, however, it would still yield north of 5%, which isn't bad at all.

Consolidated Edison (ED), which New Yorkers know as Con Ed, is an immense electric utility. It's paying a fabulous 5.6% yield. It is regulated, although not as much as it once was, so the yield is fairly safe.

General Maritime Transport (GMR), a firm that transports oil, that most precious of commodities, across the seas, pays a 6.9% yield. Looks good to me.

Now, the REITs mentioned here will not, repeat NOT, qualify for the super low Bush dividend taxation rate. Neither will the oil royalty trusts. And neither will the bond fund at the top (AGG) or in the middle (TEI). But the yield on all these remains excellent.

The strategy here is to not buy just one of these investments. As always, diversify. I would also highly recommend that you talk to your own financial advisor, and you should have a financial advisor. He or she may have his or her own ideas. But this is a start towards a Stein/DeMuth High income portfolio you might like.

Size Matters

These days, it seems like everyone is just throwing out ETF's like cinnamon sprinkles. Throw some out there, and see which one sticks. Well, although ETFs are great tools (I've emphasized thsi point in previous articles) to invest in a sector without the risks of company specific problems, don't just choose one based by names.

As of May 1, there were 107 industry-specific ETFs providing exposure to more than 30 different industries, according to a Morgan Stanley report released this week. By design, industry-specific ETFs allow investors to own a basket of stocks in a given slice of the economy.

Initially, two ETFs may appear to be similar by name, but the formulas behind their underlying indexes can result in very different portfolios. Most ETFs are weighted by market capitalization, which means larger companies receive greater representation in the index. But in an equally weighted fund, all stocks carry the same weight, regardless of a company's size, earnings, or revenues (so you'll find more small companies in equally weighted ETFs).

Here's an example of how this plays out. Two retail ETFs: the equally weighted SPDR S&P Retail ETF (symbol XRT), which includes 53 companies, and the Retail HOLDRs Trust (symbol RTH), which has no underlying index and holds just 18 stocks.

Because the S&P fund includes more small companies, it's heavily exposed to apparel--a more cyclical slice of the industry. Companies with market capitalizations of under $5 billion make up 60 percent of the fund, versus just 7 percent in the HOLDRs fund. In that ETF, retail giants Wal-Mart, Home Depot, Target, and Walgreens account for half of the portfolio.

That being the case, do check under the hood with these ETFs. When in doubt, go with the larger names. The bigger companies tend to do better in recoveries, becaue of their size and economy of scale. Plus, at the very least, you've probably heard of Coca Cola or Boeing.

Here's some top picks.

iShares DJ US Oil Equipment & Services (IEZ) holds 55 companies in the Dow Jones Wilshire 2500 Index that are suppliers of equipment or services to oil-field and offshore platform companies.

Market Vectors Global Alternative Energy (GEX): tracks the Ardor Global Index, which includes 30 global companies involved in alternative power production and supporting technologies. The fund will always have 30 percent of assets in non-U.S. companies located in at least three different countries.

PowerShares Water Resources (PHO): tracks the Palisades Water Index, which includes U.S.-listed companies involved in water supply and treatment, and in technologies or services associated with the water industry. At least 80 percent of the index's components must derive at least 50 percent of revenues from water-related activities.

Financial rebound

After free-falling for more than 6 months, has the financial sector stocks finally bottomed? Well, YES.

The financial sector crises, consisting of subprime mess and other credit problems, has driven down the sector more than 30% since last December. Now with all the surprises out of teh way, it looks like the sector is looking to rebound in the second half of the year.

There will be more bad news, yes, but not surprises. As the impact from Fed rate cuts start reflecting, and companies take measures to remedy the losses, this sector is headed for a rebound.

The world's largest financial group, Citigroup, is considering selling its Japanese consumer finance company CFJ KK or cutting the unit's business significantly as part of its plans to shed assets, Japanese daily Nikkei reported on Sunday. This is another bold move to cut the losses, and rebuilding for the future.

The biggest U.S. bank is aiming to unload $400 billion of assets within three years after being hit hard by flagging mortgage and credit markets.

Market in W-shaped rebound

Many gurus in recent weeks have come out with predictions that the market has bottomed, and is ready to rebound. Although anything is possible, the likelihood of a rebound is somewhat unlikely in my opinion. For one thing, the stock market started its decline, if not a crisis in the last days of 2007 and continued well into March of this year. The market dropped more than 20% from its peak of Dow at 14000. Now, as bad as that sounds, a market that has troubles in wide-reaching credit system, real estate bubble, worthless dollar, and inflation in almost everything in a daily need, is one that would certainly drop more than it has so far.

Looking back at the Nazdaq bubble in 2000, many "gurus" also said the market has bottomed is ready for a rebound every time there is a technical rebound. Note that the Nazdaq did not drop from 5000 to 1200 overnight, but it did so with several 1-2 month rallies in between, but only to drop even further when the steam runs out. Traders and fund managers on Wall street hates to see their portfolios drop double digits, and tends to sell at managebal losses and re-balance their portfoilios. Everytime they do that, there is a rally in specific sectors (usually the ones that has dropped the most, getting funding from trades who sold their losses in other sectors that dropped less) and thus bidding up the market. Therefore, the "rebound" we're getting in this couple weeks, really is a technical rebound and one that is NOT sustainable. Especially when many traders go on vacation in the summer, when the market tends to drop in allmost every summer, we will see this rebound dissipate. That would prove a real buying opportunity for the bulls. I would predict 4Q 2008.

Furthermore, the Fed has pretty much ran out of ammo by cutting the interest rate to 2%. Cutting anymore, would cuase a widespread infaltion that is beyond remedies.

The Fed cut rates to 2 percent this week from 5.25 percent in September. With the value of the dollar falling against foreign currencies, and rising commodity costs pressuring consumers at the gas pump and the grocery store, the central bank wants to steer clear of actions that will push prices up even more.

By lending directly to banks, the Fed can provide capital that banks need to lend to consumers and businesses without fueling higher prices in industries that don't.

By relieving the seizure plaguing financial markets, the Fed hopes it can free up the cash many banks are hoarding. This would presumably encourage banks to lend their money out through mortgages or business or car loans.

Recent months have seen surging food and energy costs. Wall Street is concerned that the threat of inflation and the persistent struggles of the housing market would force consumers, who account for about 70 percent of U.S. economic activity, to spend less.

The Fed said Friday it would boost the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.
But even after the Labor Department said the U.S. economy shed 20,000 jobs last month -- fewer than expected -- stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.

So be cautious in this market right now, and don't rush into buying stocks. Especially ones that has seen a rebound in recent weeks, as this market is certain to do a W-shaped rebound, before it really takes off into another bull run.

When insiders buy, u buy!

Whenever a buyback is announced, it is always a good idea to check out the company, its fundamentals and its prospects. Let's take a look at one company that has recently announced a buyback: Friedman Billings Ramsey Group (FBR).

Friedman Billings Ramsey's board has raised its buyback authorization for Class A shares to 100 million, from the earlier approval of 50 million. FBR has already bought back 23.6 million shares under the earlier authorization.
The company has suspended dividend payments for the current quarter. The last quarterly payment of 5 cents a share was made on Oct. 31 for the quarter ended Sept. 30, 2007.

The company's net loss expanded to $214.7 million, or $1.28 per share, in the third quarter, with heavy writedowns and losses related to its on-balance-sheet securitized loan portfolio. FBR expects its losses to narrow in the fourth quarter to $38 million. The company has completed the sale of its on-balance-sheet securitized loan portfolio and is currently negotiating the sale of the remaining $48 million of the mortgage loans.

FBR has certainly felt the pressure of the housing and financial-market turmoil, but some may feel this one is drastically undervalued because it is currently trading below book value per share.

Stock price of FBR has shot up in the past couple weeks, despite the subprime crisis.

Go Green!

If you have not noticed the increase in prices at gas pumps, grocery stores, and just about everywhere else, it's time to come out of the cave.

A large part of the inflation we are witnessing nowadays is due to the surge in oil prices. Putting aside the reasons behind this surge of oil from $30 a barrel few years ago, to the new $100 mark, it would be nice to make some money in the dire situation.

Turning this opportunity to make some profit, isntead of just paying like a dummy, you can either do energy plays with oil and natural gas. Or, you can consider the following: green energy. By doing so, you'd be investing in the future to come.

Here are six ETFs, and I've included their investment focus, international exposure, market cap, and expenses -- in each fund's holdings:

1. PowerShares WilderHill Clean Energy Portfolio (PBW)

Listed in March 2005, PBW was the first alternative energy ETF and tracks the WilderHill Clean Energy Index. The fund holds 40 U.S.-listed companies that produce green or renewable energy and related technologies. It's focused on small-caps (69 percent weighting) and is dominated by information technology companies (41 percent of holdings). The ETF charges a 0.60 percent annual fee that will weigh on gains. The relatively volatile PBW has returned a 22.5 percent gain since its inception, but dropped just over 6 percent in the past year. See PBW's full holdings.

2. PowerShares WilderHill Progressive Energy Portfolio (PUW)

This ETF differs from PBW by focusing on companies providing "transitional energy bridge technologies" -- that is, technologies that improve the use of existing fossil fuels, rather than entire new approaches. PUW also has heavy small-cap exposure (49 percent), but offers relatively diversified sector exposure: the largest single sector, industrials, constitutes just 28 percent of the fund. Since its inception in October 2006, PUW has returned a strong 18.7 percent; it also charges a steep 0.60 percent yearly fee.

3. PowerShares Cleantech Portfolio (PZD)

This ETF tracks the Cleantech Index, which aims to capture the potential for companies that "produce any knowledge-based product or service that improves operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution." PZD is heavily weighted toward industrials (59 percent), with 63 percent of its holdings in small-caps; like the other PowerShares ETFs, it has a 0.6 percent expense ratio. See PZD's full holdings.

4. Claymore/LGA Green ETF (GRN)

GRN launched in December 2006, and follows the Light Green Eco*Index, which is comprised of about 200 stocks that are in some way active in alternative energy. Yet a quick look at GRN's holdings reveals the world of difference between this and the PowerShares ETFs. Top holdings of GRN read more like the S&P 500: Mobil, Citigroup, and General Electric -- mega-cap corporations that allocate a certain (no doubt, growing) portion of their investment or R&D in green technologies, but are hardly "pure plays" on the alternative energy theme. GRN has a 0.6 percent yearly fee.

5. Van Eck Global Alternative Energy ETF (GEX)

Launched on May 9, 2007, GEX tracks the Ardour Global Index (Extra Liquid), which is composed of stocks in 30 publicly traded companies that obtain at least half of their revenue from alternative energy activity. GEX is unique among its peers in two key ways: emphasizing large-cap exposure (31 percent of the fund's holdings; small-caps are only 26.9 percent), and international reach (European companies constitute 47.1 percent of the fund, China/Japan 11.1 percent, and U.S. 41.8 percent). GEX charges 0.65 percent annually.

6. First Trust NASDAQ Clean Edge ETF (QCLN)

Launched in February 2007, QCLN follows the NASDAQ Clean Edge U.S. Liquid Series Index, which captures five subsectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The 44 stocks in this basket are almost entirely small-caps. QCLN charges a 0.68 percent annual fee.

Market turmoil

This blog ain't for the young and adventurous. Your blog is coming soon.

Wow. What a time. Housing is correcting rapidly, but from a super-high level. The stock market is correcting rapidly, too, but also from a very high level. The dollar is collapsing. As I write this, oil is hovering near $100 a barrel. What to do?

First of all, panic.


Just kidding -- don't panic.

The stock market fluctuates. It's had five good years in a row, with some of them very, very good. Even with recent corrections, at the of end of 2007 it was higher than it was at the beginning of 2007, and dramatically higher on the Dow than it was at its peak in 2000 -- and that doesn't include dividends.

Given the intense feed of negativity into the market from the media and short-sellers, it's not the least bit surprising that the markets would fall. Given the losses from subprime and its related indices at banks, and their reluctance to loan after many years of loaning too much, it's not going to be a total shock if we go into a recession. And if we do, the markets will fall more -- maybe a lot more.

This isn't a development to strike terror into your hearts -- if you're a long-term investor, it signals a time to buy. The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

So continue to buy the diversified domestic funds, especially the FSTVX, and its equivalent total market fund at Vanguard. Continue to buy the emerging markets (which had a super year in 2007) in the form of the EEM or the ADRE. Let me make this totally clear: The emerging markets won't just go up in a smooth line -- they'll fluctuate. They'll fluctuate a lot sometimes, and sometimes in a jaw-droppingly downward direction. Keep buying in a patient, thoughtful way, possibly setting it on autopilot.

Keep buying the developed markets in the EFA, also in a disciplined, ongoing way. Europe has its problems for certain, and so does Japan. But they benefit from the falling dollar and are extremely big economies, and tend to fluctuate a lot less than the EEM as well. But they will fluctuate. Stay in them patiently and you'll be rewarded.

Now, about housing: I fully respect the people who say that housing is going to fall even further than it already has. In my beloved Southern California, housing is falling far and fast, so I see it all around me. But buying a home isn't like buying a stock or a barrel of oil. A home is a unique item -- it's about the heart as much as the head. It's about falling in love with the place in which you live.

In my experience as a homebuyer, there are so few homes that one really falls in love with that if you find one you do love, you should snap it up (if you need it and can afford it). I urge this even though housing is likely to fall even further.

There's some economic rationale to this course of action as well. The history of home prices tells us that when housing reaches a peak, it falls (of course), but then when the next wave comes along, that wave lifts housing higher than it was at the last peak -- often far higher. In the meantime, you get to live in the home rent-free -- with the "imputed rent," which is sort of a dividend composed of the rent you would have had to pay if you'd lived in the home as a renter. (If you owned a bond with that same yield as your imputed rent, you would have to pay tax on it.)

For house flippers, these are really hard times, and I can only say that if they're highly leveraged, get out of the leverage as fast as you can. If that means selling at a loss, it's preferable to an even bigger loss.

Housing cycles, by the way, are usually very long ones. This time may be different, but usually they last five or more years, so don't expect a turnaround soon. (I could be wrong, and in this case I hope I am.)

Again, don't panic. We've been through many recessions since World War II, and we always get through them and go on to a brighter future. And we always look back and say we wish we had bought more stocks and more real estate when times were hard.

As for oil, there's no harm at all in buying a chunk of the XLE, the index fund for energy securities. It's had a phenomenal move in the last few years, and usually that spells correction. But over very long periods, you'll do fine.

Short term investors, look for my blog in the coming weeks. I will have one on profiting in a bear market, and volatile markets.