Buy Dividends, Maybe Buy Russia, Don’t Buy Spending Plans, Nationalizations to Come and More!

by Addison Wiggin & Ian Mathias

  • Back at the bottom… markets on the verge of new credit crisis lows
  • Jim Nelson on why you need dividends now more than ever… and what sectors to target
  • Russian stocks devastated, now world’s cheapest index… time to buy?
  • Stimulus bill passed, more bailouts already emerging… automakers, homeowners ask for billions more
  • Washington’s latest scheme: Sen. Graham, Greenspan hint of “nationalizations” to come

  In the markets today, a crossroads:

As you’ve likely heard, most U.S. stocks got slammed yesterday. The Dow fell 3.8%, to a closing score of 7,552.6. That’s less than four tenths of a point above the all-time credit crisis low, set in November of 2008. One more point down and we’re essentially back to 1997.

  “2009 will be the worst year for dividends since 1942,” says Lifetime Income Report editor Jim Nelson, citing a Standard & Poor’s study. “The market research company predicts dividends in its cornerstone index, the S&P 500, to drop 13.3%, or a total of $33.24 billion. For dividend seekers, that doesn’t bode well. But the important thing to remember is that while navigating this market just got a lot harder, the end result is worth it.

“During the most recent recessionary period, 2000-2002, dividend payers beat nondividend payers by 47%, according to Motley Fool’s Ilan Moscovitz. And that was a puny recession. In the decade following the 1929 stock market crash, the S&P 500 stayed virtually flat on an annualized basis. That’s only because of reinvested dividends. Without that safety net, investors would have lost about 5.5% annually for the 10-year period.

“But it’s not just during recessionary periods when dividends play a big role. It’s also in the recovery period after recessions. If you had reinvested S&P 500 dividends and held for 25 years following the ’29 crash, you’d be sitting on a 334% return, while everyone else would be right where they started — at 0%.

“The problem we have is finding the right dividend payers. If a company is going to slash its payments, there’s no point. At the moment, it’s all about industry.” Jim sent this table as proof… dividend alterations among S&P 500 companies last month.

  “Commodity traders should remain fixated on stocks,” warns our resource man Alan Knuckman. “Even if you are positioned nicely in metals, that demand destruction [in equities] eventually holds back commodities. Copper, corn, soybeans and sugar are suffering again lately — not on their own merits, but on the larger global decline in consumption for goods. A catalyst is needed to get things going again on the upside.

“Right now, Resource Trader Alert readers are in a great position with gold and silver option spreads to watch the stock market sort things out. The rest of the commodities markets are on hold until stocks stabilize and start moving again.”

Alan’s readers cashed in a healthy 100% gain yesterday after selling half of their gold call spreads — proof that smart commodity trading can be great insulation from a rocky stock market. We’re currently discounting his services by quite a bit… if you’d like to test the water, this is your best chance. Details here — offer expires tomorrow.

  Gold is still holding up after its swift rise yesterday. The spot price jumped over $30 Tuesday, to as high as $972. We’re seeing just a little bit of profit taking so far today, but an ounce of the stuff still goes for around $968.

  Gold demand soared 26% in the fourth quarter of 2008, the World Gold Council proclaimed today. Companies, collectors, governments and investors sought out 1,036 metric tons of the stuff, just shy of the record set in the third quarter and 26% higher than at the same time in 2007. Interestingly, “identifiable investments” accounted for nearly all the growth… demand for bars, coins and gold-holding ETFs shot up almost threefold.

  As Alan hinted, while gold soars, other commodities are still in the doghouse. Oil is likely the most prominent example… a barrel goes for $34 today, just a couple bucks shy of a credit crisis low.

It’s been a rough week so far for natural gas bulls too. The front-month contract is barely clinging to $4, down around 5% this week and over 80% from its highs in summer 2008. Thus, we weren’t too surprised to see Chesapeake Energy, the biggest American nat gas wrangler, miss earnings yesterday.

  And if you think you’ve been burned by the commodity crash, check this out: Legendary energy investor T. Boone Pickens reported yesterday that his hedge fund crashed 97% in the fourth quarter of 2008. Pickens’ entire portfolio was composed of oil, gas and alt-energy names, and his war chest shrank by over $890 million during the quarter. Ouch.

Just imagine if oil and gas exports were the staple of your country’s entire economy… would be hard times, no?

  “The Russian stock market is now trading at a forward price-to-earnings ratio of 2.7,” Chris Mayer dutifully notes in his latest Special Situations alert. Such a valuation makes the world’s 10th largest economy essentially the cheapest market in the world… valued even lower than perennial market dogs like Argentina and Pakistan. “Argentina, a mess of a country, enjoys a price-to-earnings ratio three times greater than Russia’s.

“Russia is rich in natural resources. Gazprom, the state gas monopoly, has a natural gas field in east Siberia with reserves that alone would equal those of Canada, the world’s third largest producer of natural gas. Russia itself has one-quarter of the world’s natural gas reserves. It is also the world’s largest natural gas producer, and second largest exporter of crude oil in the world, behind only Saudi Arabia. Because of this, the prospects for Russia’s economy largely hinge on energy prices.

“Energy prices cracked in 2008 and have not recovered. The Russian stock market was also taken apart. (See nearby chart). That’s what happens when your chief export falls 75% in price.

“Bullish sentiments on Russia find foundations mostly in the cheap valuation of Russian stocks. But if you also believe in the coming bounce in commodity prices, Russian stocks are clear winners in such a scenario. At only 2.7 times forward earnings, are you compensated for taking the risk?

“The best way to play a rise in Russia’s stock market is to buy the Russian ETF, which trades under the symbol RSX. This gets you a basket of Russian stocks — heavy on the oil and gas, of course. It’s a tempting speculation. Whatever 2009 holds, as fund manager Eric Kraus writes, ‘Boredom is unlikely to be a major concern.’”

(Chris’ latest Special Situations issue — dealing with topics from investing in Russia, to Brazilian gold, to Scandinavian fertilizer — is a must-read for any investor seeking alternative investment advice. Gain access by subscribing, here.)

  Back in I.O.U.S.A., just one freaking day after President Obama signed the $787 billion stimulus bill, we’re already hearing calls for more government spending.

For starters, GM and Chrysler came back to Washington with their tin cups in hand, this time asking for another $21 billion. Taking a cue from the current administration, Chrysler chairman Bob Nardelli said that a failure of either company would be “cataclysmic” and that not floating Chrysler another $5 billion would cost up to 3 million jobs and $150 billion in lost tax revenue. 

Both companies pledged to cut 50,000 jobs by the end of the year.

  And President Obama himself unveiled another spending plan — a $50 billion foreclosure prevention program . If and when this one goes through, Treasury Secretary Tim Geithner said the administration “will be using the full resources of the government to help bring down mortgage payments and to reduce mortgage interest rates.” The plan is expected to target homeowners approaching default by forcing lenders to lower rates or lengthening loan terms.

  With that in mind, “It may be necessary to temporarily nationalize some banks,” uttered Alan Greenspan yesterday, “in order to facilitate a swift and orderly restructuring.” Incredibly, leaders of the world are still looking to this man for advice.

“The least bad solution is for the government to take temporary control,” he suggested at the Economic Club of New York, which would “allow the government to transfer toxic assets to a bad bank without the problem of how to price them.” Heh, what a pesky problem, indeed.

“We should be focusing on what works,” Republican Sen. Lindsey Graham mimicked soon after, casting out the idea to see if it floats with the American public. “If nationalization is what works, then we should do it.”

  Last today, we note the free market is doing just fine managing the U.S. housing market: Construction of new homes plummeted 56% in January, to the lowest level on record. The Commerce Dept. reports today that housing starts fell to an annual rate of 466,000 last month, down 17% from December and 56% from Januray 2008. That’s also the lowest annual rate since at least 1959, when the government started keeping track.

Building permits fell by a record magin too, the same report said. Approved applications to build new homes have crashed 50% since this time last year.

  “To the comment by another reader regarding out-of-control military spending,” writes a reader, “I would add this: Not only is the DoD budget gargantuan, but every little unit, every command, all divisions and, in fact, all branches are essentially encouraged to spend every dime of their respective budgets every year. Because they all know that if they do not, then they risk receiving fewer operating dollars the following year. Notwithstanding budget shortfalls for some missions (if we are to sustain our current course), not every unit needs every dollar every year. But do you think there is any incentive to save and return those dollars for more critical needs elsewhere? Hah! Fat chance.

“But wait; this is not the case just for the DoD. This practice is pervasive throughout our beloved (ahem) federal government. Every employee in each department and agency (here’s an A-Z list of ’em) is encouraged to spend every last penny. Perish the thought of saving the dollars you don’t need. Of course, the savings wouldn’t amount to much in today’s federal lexicon of ‘-illions.’ And Treasury would only mismanage the savings in other ways. As you are wont to say, what a mess.”

  “If not for the military,” a reader writes, also responding to the last bit of reader mail yesterday , “and the advancements in technology brought about by it, you, sir, would be speaking German or Japanese and may soon be speaking Spanish. Your ridiculous, poorly conceived and stupid comments have no place in a capitalist democracy. Perhaps you should listen to your own words you quote — Gen. D. Eisenhower, Gen. G. Washington, just to name two. Several great leaders of industry were military personnel that showed great integrity, responsibility and love of country, instead of the GIANT crooks at the helm of the present debacle. The training received in the military is priceless in molding leaders.

“I can only imagine that you do not even know how to honor our flag and national anthem. What do you do? Talk on your cell phone and remain seated when the anthem is played? It is typical of people who make those statements. Why not look at the real problems, instead of joining the Washington ostriches whose heads are so far up their butts they must have a hard time breathing. Stimulus!! Another way of saying “PORK.” Solve the problem!! NO. It is only going to make it worse, and your kind of thinking adds to it.”

  “You think Obama,” says the last reader, “went to Denver’s Museum of Nature and Science because Colorado is at the forefront of ‘green’?! Ha, ha! That’s NOT why! Anyone who has been to DMNS knows that it has one of the nation’s best exhibits on gold mining, with a huge collection of giant nuggets and other gold artifacts collected from the mountains west of Denver. No doubt Obama was trying to send a hidden message to his Chicago friends over what to invest in next.”

The 5: “You can’t be serious,” Addison texts in response from our quarterly editorial meeting (he’s become a model of multitasking after his recent iPhone purchase). “It was the Obama administration who said Denver was the green forefront, not us. And we doubt he’s sending any gold oriented messages, although we’re all too happy to take the suggestion ourselves.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Addison will be in and out this week, as our executive and editorial teams are hard at work crafting new investment ideas for you. One of those ideas has already come to fruition: The reinvention of Resource Trader Alert… we have a new editor, new focus and a new price. But our re-launch price will expire tomorrow night, so if you seek commodity trading advice, now’s your chance… right here.

P.S.S. And here’s a juicy rumor creeping from that editorial meeting: The Daily Reckoning, our flagship e-letter, is celebrating its 10th anniversary this year. Addison says a serious party is in the works for the DR at this year’s Investment Symposium in Vancouver… perhaps a full-blown, black tie affair. If you’re at all familiar with AF celebrations, this should be very exciting and a bit frightening at the same time. Stick with The 5 for details.


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