by New Frontier Trader Research Team

About a decade ago, Jim O’Neill, then the Managing Director of Goldman Sach’s Investment Management Division, first used the acronym “BRIC” for Brazil, Russia, India and China in a report entitled “Building Better Global Economic BRICS.”

In that report, he noted that by the end of 2000, “GDP in US$ on a PPP basis in Brazil, Russia, India and China (BRIC) was about 23.3% of world GDP. On a current GDP basis, BRIC share of [the] world is 8%.”

He then went on to predict that those emerging markets would outperform the western world in terms of real GDP growth. But that was only the short-term picture, he claimed. “Over the next 10 years, the weight of the BRICs… will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.”

And boy, but was he right.

China, especially, can now influence western markets simply by faltering… or even the hint that it might falter sometime somehow in the future. It can even be argued that Europe and the U.S. – or at least their stock markets – are beginning to base their security on China, especially considering the massive amount of U.S. debt China owns and how much it is now scooping up in Europe.

And while they don’t make the news nearly as often, Brazil, Russia and India are all making and changing history too these days, sometimes in good ways and sometimes by far less desirable means, such as Russia’s uncomfortably close ties to Iran or China’s open support of North Korea.

But regardless of their methods, it’s hard to deny that all four are growing in influence, even if some of that growth seems slow and painful at times, especially in countries like India. While India, with its massive population and growing opportunities for business – thanks to a little Western invention called outsourcing – has a lot going for it, the country has allowed numerous internal factors to bog it down for the time being.

Up until last year, few investors had any such doubts about Brazil, however. Outside opinion pegged that country as headed nowhere but up ever since it emerged from the global recession a few years back. Its annual GDP growth might not have been as impressive as China’s – which is partially due to carefully crafted government smokescreens anyway – but it was still moving at a steady clip all the same.

Notably, the Latin American nation was quick to exit the 2008-2009 recession that dragged so much of the global economy down. It only suffered two quarters of negative growth before bouncing back. And in 2010, GDP grew by an impressive 7.5%, sparking Brazilian fever in investors worldwide.

But Brazil ran into some trouble last year, provoking instant negativity from countless analysts who were suddenly all too ready to throw it to the dogs. For better or worse, it calmed down the hype enough so that investors could more easily step back and analyze the country through realistic lenses.

For those that did, they probably quickly came to the conclusion that Brazil is just like any other investment area: No matter how hard anybody tries to paint it as perfect, it’s not by any means a sure thing and shouldn’t be treated as such.

A Quick Low Down on Brazil

Any way you look at it, Brazil is a big country.

The CIA’s World Factbook puts it 8,514,877 sq km, which makes it just “slightly smaller than the US” and definitely the largest nation in Latin America. On a global scale, it measures up quite nicely as well, with only Russia, Canada, the U.S. and China ranking higher in sheer size.

The giant holds up financially as well, surpassing the United Kingdom last year as the sixth-largest economy in the world. And it has a population of 195 million people, many of whom are rising from poverty for the first time and therefore eager to spend.

But Brazil has more going for it than sheer size. As Rolls Royce’s South American President Francisco Itzaina put it earlier this year, “God blessed Brazil with huge amounts of natural resources… Brazil is very well placed for the future.”

That’s an easy conclusion to come to considering the country’s long list of commodities it has to offer and enjoy. It’s easily number one in coffee production and sugarcane – accounting for nearly a third in the former and half in the latter – and exports significant amounts of beef, poultry, soybeans and corn.

And that’s not all by far. Published on SeekingAlpha.com, Armine Bouchentouf describes Brazil as being “endowed with massive natural resources” that also cover the energy and mining industries. As of late last year, Brazil had control of “an estimated 12 billion barrels of oil and… [held] the second-largest reserves in Latin America, right behind Venezuela.”

Far more recently, BBC News business reporter Will Smale wrote that, “With substantial oil and gas reserves continuing to be discovered off Brazil’s coast in recent years, the country is now the world’s ninth largest oil producer, and the government wishes to ultimately enter the top five.”

Naturally, that has countries around the world courting it heavily. China has invested heavily into Brazil’s infrastructure and commodities businesses already, and it just beat the U.S. out on obtaining even more offshore crude. President Obama even went so far as to personally travel down to the Latin American BRIC to put in an offer for the oil, offering loans and incentives to extract the hot commodity in an “environmentally responsible manner.”

Judging by Brazil’s ultimate decision, China one-upped America in the bidding war. But the larger story just goes to show how valuable the South American nation really is on a global scale.

Concerning its mining capabilities, commodities analysts expect Brazil to produce 772 million tons of iron ore and 662,000 tons of copper by 2015.

It also features a solid amount of gold. In 2010, it produced around 61 tons but that number is expected to climb to 94 in three years’ time as both private and government-owned companies pour money into the mining industry in general.

With many Latin American and Asian economies growing rapidly, all of that output translates into easy cash. North America, Europe and Japan still need their fair share of materials and food of course, but that burden has been drastically increased over the past few years as new consumer classes emerge in previously unexpected areas of the world.

Unless something exceedingly drastic changes locally or in the global economy, Brazil shouldn’t have any trouble trying to offload its commodities in the coming years. But even if it inexplicably does, it won’t suffer nearly as badly as its fellow BRIC country, China.

No matter how far it’s progressed, the Chinese economy still has far too much tied into its international trade. But while exports contribute about 40% of GDP in the Asian nation, in Brazil, that number falls significantly to 13% or 14%. And that’s a much more manageable number in the kind of troublesome global economy like the world has seen for the past few years.

Not Quite the Golden Goose It Seemed but Still Worth a Gander

All of that impressive economic data doesn’t make Brazil any kind of investment holy grail, however. Like every other country – established, emerging or other – it has its problems. And those problems made themselves known particularly well last year.

Trouble first really started rearing its head in June 2011, when economic activity fell into negative territory for the first time since December 2008. Not surprisingly, industrial production and business confidence tanked right with it.

The very next month, job growth came in lower than 10 out of 10 Bloomberg economists predicted. All of that combined to present a far less optimistic – though hardly negative – picture of Brazil’s future profitability. And by the end of August, most economists had revised their original opinions on the nation, cutting their expectations for end-of-the-year GDP results three times in three weeks down to 3.84%.

Brazil was beginning to look like a one-trick pony after its impressive 7.5% growth the previous year.

A lot of factors went into that decline, including a rapid rise in inflation, which hurt consumers across the country and significantly bit into domestic spending. And falling commodities prices didn’t help either.

Between May and September 2011, oil especially was trending downward, much to the delight of vehicle owners everywhere but not so much for anybody with money in the industry, including entire countries like Brazil. Meanwhile, gold experienced several significant setbacks along the way as well.

Finance Minister Guido Mantega added that intentional government attempts to slow things down in order to maintain sustainable growth and a more natural cooling period following the mad rush out of the recession contributed as well.

All of that led noteworthy investment analyst Martin Hutchinson to conclude that Brazil might not be the safest place to park your money. Admittedly, he wasn’t thrilled with Russia, India or China either, and he had better things to say about Brazil than some of the others, but he still offered these words of caution:

“Brazil has been run by big-spending socialists since 2002 and has been immensely lucky to benefit from the commodities boom. Now the boom has topped out (probably temporarily) but its government is still overspending and has begun to harass foreign investors. Brazil is in big trouble if commodities prices fall.”

Forbes contributor Kenneth Rapoza agreed. Sort of.

He admitted that Brazil’s economy was slowing down significantly from its 2010 activity. And late last year, he fully predicted that kind of weak growth to continue through the entire fourth quarter before falling even further in the early months of 2012. But he also expects the economy to come bouncing back after that… enough to capture an extremely decent 5% growth for this full year.

If he’s correct, that makes it a worthwhile stop for investment money. But with the global economy as uncertain as it is, Brazil is still something of a gamble in both the short-term and the longer run.

Even with most of its economic growth generated internally, the Eurozone financial crisis can still adversely affect Brazil in more than just how much it exports. If investors panic over Greek debt and IMF bailout plans, they’re probably going to panic over everything, including commodities. And there’s no way to know just how far they’ll press prices down if and when they’re forced to confront just how bad the situation in Europe really is.

Even if everything goes perfectly well, investors need to understand smaller issues still holding onto the once-third world nation, which can easily affect individual businesses.

Taxes, for one thing, are higher than they should be, eating into existing business’ profits and putting a damper on any non-government sanctioned entrepreneurial attempts. Weak infrastructure doesn’t help either, causing backlogs and traffic jams enough to frustrate both individual citizens and businesses alike. And corruption and crime still dominate many sections of the country straight up into the political ranks.

Not that political corruption isn’t anything that the West doesn’t have to deal with on a regular basis as well. But it can make things even more difficult in an emerging market that still has so many other issues to deal with as well.

A final significant issue that plagues Brazil comes down to a combination of protectionism and poverty. While its middle class is rising rapidly, that growth doesn’t seem enough to sustain its growing needs as consumers.

For example, the UK’s Guardian reported last year that “Brazil trains less than 40,000 engineering graduates and architects a year, whereas industry and construction need 60,000.” And that’s true of other sectors that depend heavily on skilled workers as well.

Brazil could probably easily fill at least some of that gap by reaching out to foreigners, but that simply doesn’t seem to be in its nature as evidenced by its population status, which includes barely a handful of legal immigrants at all, much less skilled ones.

The country currently seems much more into remaining “pure” than advancing itself, which is, of course, its prerogative and doubtlessly has its benefits. But when it comes to short and mid-term economic health, Brazil only seems to be hampering itself in this regard.

In the end, what investors can conclude from all this information is that Brazil is a great place to invest… just with caution.

by New Frontier Trader Research Team

Between July 6, 2009 and November 30, 2009, Alex Green’s New Frontier Trader service made 82.57% on Buenos Aires’ Banco Macro.

It made 61.97% on China’s 51job between August 17, 2010 and November 10, 2011.

And between January 1, 2011 and June 6, 2011, it booked 17.48% on Buenos Aires’ MercadoLibre.

As evidenced by those examples, there’s money to be made in the less traditional areas of the investing world known as emerging markets.

Emerging markets are countries with economies that are still in the process of moving from a third world status into a first. And as such, they have great potential for growth… typically much more so than the usual places to invest, such as the United States and Europe.

Traditionally speaking, after all, the U.S. economy – a well-established nation with significant global influence – grows at a mere 2 or 3% per year. China, on the other hand, for all of its human rights violations, continuing communism and exceedingly poor underclass, claims anywhere from 8-10% per year.

That’s a significant difference by any measure.

When a country’s GDP grows, it usually does so because its citizens and their businesses are growing. People spend more, invest more, and demand more, encouraging the economy to expand in order to properly suit their needs.

For example, the Latin American emerging market of Brazil has always had potential in investors’ books. With its impressive land size, expanding population and abundant amount of commodities, it holds untold fortunes. The only problem was that it couldn’t seem to live up to everything outsiders were sure it could be.

For decades, its problems were numerous and obvious: a poor economy and poor citizens coping in the middle of a largely uncertain political terrain marked by corruption, dictatorship and warring factions.

In 1994, that all started to change though. The ruling government came together with businesses to act in the best interest of the country instead of itself, setting Brazil on an enriching path of prosperity and growth.

As emerging markets researcher, Tony Daltorio, explained for Investment U, by 2009, it had succeeded in “lowering inflation to a reasonable level, reducing net debt to an enviable 40% of GDP, paying off all [of its] IMF loans, aggressively boosting foreign reserves to $200 billion, and achieving a ‘cherished’ investment grade rating for its sovereign debt.”

Similarly, from 2001 to 2007, the country’s impoverished saw their income increase nearly 50%. By 2010, over 30 million people of Brazil’s 190 million had successfully risen out of poverty, moving into the ranks of the consumers where they could benefit and take advantage of:

• Airlines like Gol Linhas Aereas Inteligentes (NYSE: GOL) and Tam ADR (TAM)
• Telecommunication companies such as Tele Norte Leste (NYSE: TNE) and TIM Participacoes (NYSE: TSU)
• Banking services like Banco Itau (NYSE: ITUB) and Banco Bradesco (NYSE: BBD)

Naturally, the more business Brazil’s emerging middle class gives those businesses, the more profitable they become (or should become, if they’re doing it at all right) and the more attractive they become to investors.

… Hence the appeal of up and coming economies: They have more room to grow and therefore oftentimes more profits to offer.

The Downside of Investing in Emerging Markets

That all isn’t to say that there isn’t a downside to investing in emerging markets. Because there is. And it can be a big one.

Just like they have a bigger potential for sizable profits, they also carry a more substantial risk of significant losses.

Between changing governments trying to figure out what works and what doesn’t, businesses figuring out for the first time how to deal with larger clientele bases – or just clients at all! – and consumers experiencing the heady rush of getting to choose their likes and dislikes instead of having to settle for the barest minimum, the investment climate can all too easily become scary.

There is also often lingering corruption from the old order, unfamiliar customs and preferences, and dicey means of transportation for businesses to rely on. And not every country can rise above all of those obstacles or, even when they do, it can take years and even decades to do so.

There is no guarantee an emerging market or the businesses it houses will automatically do well.

For every Brazil out there, there’s at least one Russia, if not more. And for all of the positive whispering going on about the former Soviet Union right now, investors should consider just how many outside companies fled the country – or got kicked out! – after they tried their luck there.

Only a few years back, Russia was a significantly sized destination for intrepid investors to park their cash. Big businesses in Europe especially saw the potential of over 141 million citizens in a country that seemed to be shrugging off its communist past.

One of the more prominent businesses that misread the political climate was British Petrol (NYSE: BP). In 2003, then-CEO John Browne flew from England to Moscow to kick-start TNK-BP, a joint venture with the state controlled Rosneft to profit off of the country’s noteworthy amount of oil.

Russia had the resources and BP had the ability to get at them. It seemed like a win-win for everybody! That is except for Mikhail Khodorkovsky, essentially Rosneft’s boss until he fell foul of then-Russian President Vladimir Putin and got thrown into jail for it… conveniently allowing Putin to take over the company.

For the good of Mother Russia, of course.

With that kind of track record, it was no wonder then that just five years later, Bob Dudley, who was the boss of TNK-BP at the time, had to literally flee the country due to “sustained harassment” from the local government.

Admittedly, that didn’t stop the combined business from continuing to do well. As of 2010, TNK-BP even made up a full eighth of BP’s profits. But only a well-established big business with a main product as necessary as oil can thrive under those kinds of conditions.

And even so, BP got lucky. Individual investors putting their money into individual Russian stocks have significantly less chances of getting out intact.

Problem is, it’s not just Russia. The same holds for China with its still largely government controlled businesses, India with its continuing caste system that holds so much of the country back, South Korea with its problematic northerly neighbor constantly keeping it on its toes, and so many other investing hot spots.

Even the highly ballyhooed Brazil isn’t above criticism.

As Minyanville notes, “2011 was a rough year for emerging markets across the board as investors pulled cash out of these volatile economies and loaded up on bonds and ultra-safe US blue chip stocks instead.”

Argue all you want that the established economies in Europe and the U.S. didn’t exactly do well in 2011 either. But it won’t do much good.

If for no other reason than misplaced perception, emerging markets spook investors just as much if not more than they excite them.

When it comes down to it, investing in general can be dangerous. But investing in unknown elements in countries that still have a decent way down the road to a stable and profitable democracy can be even more so.

Diversify Your Portfolio with Some Emerging Market Goodies

With that caution aside, investing in emerging markets still isn’t a bad idea. In fact, it’s actually recommended to put a portion of your portfolio into those countries, just as long as you take special precautions.

One way to do that is to let somebody else like Alexander Green do the work for you. In his New Frontier Trader, Alex does the research into specific countries and companies for you and emails his conclusions. (To find out more about the New Frontier Trader, click here.)

Of course, there are still no guarantees. There usually aren’t any in life. But Alex has 20+ years experience as a research analyst, investment advisor, financial writer and portfolio manager, which can go a long way.

If you don’t want to shell out the money for his time, however, there are plenty of Exchange Traded Funds (ETFs) that focus solely on emerging markets.

These conservative plays act as single stocks but actually profit off of multiple companies at once. Investors can choose ETFs that invest in only China, Brazil, India, etc. Or they can further diversify by buying up ones that hold companies across Asia, Latin America or Africa.

This can cut down on potential profits – if one particular company does very well, investors don’t make the same kind of money somebody with direct shares would – but it also protects against possible losses in the same way.

Or, for those investors who can afford a little extra risk, plenty of great companies have been springing up around the world in the last few years. Many of them are even listed on U.S. exchanges, which usually is a pretty decent indicator that they’re less likely to crash and burn.

Though, with that said, it’s still just as important to properly research them with the same diligence necessary for any other company.

Emerging market stocks can easily become an important part of any portfolio. Just don’t make the mistake of thinking every single one of them is going up just because it’s in a country that sounds good.

by Alexander Green, Investment U Chief Investment Strategist

Monday, January 16, 2012: Issue #1687

Make no mistake. Investors are petrified right now. And they’re telling their investment advisors about it.

The question is: “What is he or she doing in response?” If the answer is adjusting your asset allocation, focusing on your long-term investment goals, or doing a bit of handholding, you probably have a good one.

But if they’re preying on your emotional state with unsuitable investments or all-or-nothing advice, beware.

The story is as old as equity investing itself. When times are good, investors get complacent, take too much risk and generally regret it. When times are bad, investors become anxiety-ridden, take too little risk and generally regret it. Seasoned advisors know this and try to keep you on the right track. But less knowledgeable or less scrupulous advisors may try to take advantage of your worries.

For instance, your investment advisor may recommend that you load up on variable annuities in this uncertain environment. Not a good idea. Some annuities are right for some people. They offer tax-deferred compounding (like an IRA) and a principal guarantee. But the typical annuity is ridiculously expensive, offers mediocre insurance coverage, restricts your investment choices to so-so mutual funds, lacks liquidity and comes with enormous surrender penalties.

Too many investors learn these things about annuities after they’ve plunked for one. Hence, you’ll often hear investors complain that they are “stuck in an annuity” for several years. Investigate these insurance contracts before you invest. On the whole they are oversold, frequently misrepresented and completely inappropriate for many folks.

Another sign that you have a misguided (or unethical) investment advisor is if he suggests that you abandon proven investment principles. For example, if your investment plan is based on a broker’s economic forecast or market timing advice, good luck. You’re going to need it.

No one can accurately predict the economy with any consistency. And it wouldn’t really matter if they could. Stocks routinely rally during the bad times and sell-off during the good ones. If your investment advisor doesn’t know this, you shouldn’t be using her. If she does and is still trying to convince you to flee the market, that’s even worse.

Also beware investment advisors who are paid on a transaction basis and therefore have an incentive for you to trade more frequently. Some brokers today are telling their clients that the old rules no longer apply, that you need to jump in and out of the market and from stock to stock. For a commission-based broker, this can be entirely self-serving advice. And it is almost certain to end badly… at least for the client.

I know it’s tough to buy – or just hang in there – when the outlook is dark. But look back at history. The market was a screaming “Buy” after the crash of ’87, the bear market of 1990, the tech wreck of 1994, the Asian Contagion of 1997, the 2000 to 2002 bear market, and even during the depths of the financial crisis in 2008.

If you’re using an advisor who insists that “this time it’s different,” you might reasonably examine his experience, his ethics and his disciplinary history. And seek out more-qualified advice.

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 09, 2012: Issue #1682

Not long ago, my colleague Mark Skousen asked a roomful of attendees at an investment conference how many of them owned gold. Virtually every hand in the room went up.

“And how many of you have ever sold any of your gold?”

Virtually every hand in the room came down.

For many investors, gold is their “forever investment,” the one asset they never plan to sell. That could be a mistake, a big one.

I can assure you that the institutional investors who have bid gold up the last few years consider the metal a “hot date,” not a long-term marriage. And that bodes ill for prices in the short to medium term.

Yes, I was bearish on gold a year ago. But I’m more bearish on it today. After all, the trend is your friend.

True, gold went up in the first half of 2011 and didn’t peak until August. But take a look at a five-month chart.

It’s not a pretty picture.

Of course, gold is hard to value under the best of circumstances. It has very few industrial uses. It generates no earnings, pays no dividends, accrues no interest and provides no rental income. That means the best any of us can do is guess where it’s headed next.

So why am I guessing it will be lower? Let me count the ways:

1. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?

2. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.

3. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.

4. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.

5. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Soros and several other major speculators are openly forecasting outright deflation. That would not be good for gold.

6. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.

7. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.

I’m not suggesting that anyone bail out of gold. You should hold at least 5% of your liquid assets in gold and gold stocks, and perhaps more. But if you’re one of those folks I meet who has 30%, 50% … even 80% in the barbarous relic, you’re really sitting at the roulette table at 3 AM.

No one can say unequivocally that the bet won’t pay off. But there could be a steep price to pay if it doesn’t. The last time gold was a bubble, investors were down more than 60% two decades later.

As Mark Twain said, “History may not repeat itself. But it rhymes.”

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677

Investors are scared right now and it’s not hard to see why.

Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.

We have all heard these negatives repeated daily and cycled endlessly in the national media.

However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)

Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.

This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.

If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…

Contrarian Investing Works

It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.

A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.

In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)

Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.

I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”

I’m trying to contain my glee. Who says no one rings a bell in the stock market?

The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:

1. Is logic or emotion governing my decision making about my portfolio?

2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?

We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 26, 2011: Issue #1672

[Editor's Note: Alexander Green, author of the best-selling book Beyond Wealth, originally wrote this essay for his Oxford Club weekly newsletter Spiritual Wealth.

In the spirit of the holidays we decided to depart from our normal financial topics to bring you Alex's inspiring anecdote of Charles Dickens, "The Man Who Invented Christmas."]

Last weekend, my family, some friends and I attended a performance of “A Christmas Carol” at the American Shakespeare Center in Staunton, Virginia.

It was superb. The kids particularly enjoyed it and were surprised to learn that the author – Charles Dickens – is the man most responsible for the modern celebration of the season. This is a story that deserves to be more widely known…

Dickens is one of the greatest writers in the English language. He published 20 novels in his lifetime. None has ever gone out of print.

Yet in 1843, Dickens’ popularity was at a low, his critical reputation in tatters, his bank account overdrawn. Facing bankruptcy, he considered giving up writing fiction altogether.

In a feverish six-week period before Christmas, however, he wrote a small book he hoped would keep his creditors at bay. His publishers turned it down. So using his meager savings, Dickens put it out himself. It was an exercise in vanity publishing – and the author told friends it might be the end of his career as a novelist.

Yet the publication of A Christmas Carol caused an immediate sensation, selling out the first printing – several thousand copies -in four days. A second printing sold out before the New Year, and then a third. Widespread theatrical adaptations spread the story to an exponentially larger audience still.

And it wasn’t just a commercial success. Even Dickens’ chief rival and foremost critic, William Makepeace Thackeray, bowed his head before the power of the book: “The last two people I heard speak of it were women; neither knew the other, or the author, and both said, by way of criticism, ‘God bless him!’ What a feeling this is for a writer to be able to inspire, and what a reward to reap!”

Today we all know the tale of tight-fisted Scrooge – “Bah! Humbug!” – and his dramatic change of heart after being visited by the ghosts of Christmas Past, Present and Future.

But A Christmas Carol didn’t just restore Dickens’ reputation and financial health. It also breathed new life into what was then a second-tier holiday that had fallen into disfavor.

As Les Standiford notes, in early nineteenth century England, the Christmas holiday “was a relatively minor affair that ranked far below Easter, causing little more stir than Memorial Day or St. George’s Day today. In the eyes of the relatively enlightened Anglican Church, moreover, the entire enterprise smacked vaguely of paganism, and were there Puritans still around, acknowledging the holiday might have landed one in the stocks.”

The date of Christmas itself is an arbitrary one, of course. There is no reference in the gospels to the birth of Jesus taking place on December 25, or in any specific month. When Luke says, “For unto you is born this day in the city of David a Savior,” there isn’t the slightest indication when that was.

And while the day was marked on Christian calendars, celebrations were muted. That changed when A Christmas Carol became an instant smash, stirring English men and women to both celebrate the holiday and remember the plight of the less fortunate. This was exactly the author’s intent.

Dickens grew up in poverty and was forced into child labor. (His father, a naval pay clerk who struggled to meet his obligations, was thrown into debtor’s prison.) Yet despite these handicaps, Dickens educated himself, worked diligently, and rose to international prominence as a master writer and storyteller.

He was a great believer in self-determination and, in particular, the transformative power of education. With learning, he said, a man “acquires for himself that property of soul which has in all times upheld struggling men of every degree.”

Yet in the London of Dickens’ day, only one child in three attended school. Some worked in shops, others in factories. Still others resorted to theft or prostitution to live. Dickens was determined to expose their plight. A Christmas Carol, in particular, is a bald-faced parable, something few novelists attempt… and even fewer successfully execute.

Dickens said his novels were for the edification of his audience. His goal was not just to entertain, but to enlighten. And A Christmas Carol was designed to deliver “a sledge-hammer blow” on behalf of the poor and less fortunate.

It worked. Scrooge – a character as well known as any in fiction – is now synonymous with “miser.” Yet through his remarkable transformation, the author reminds us that it is never too late to change, to free ourselves from selfish preoccupations.

Dickens’ biographer Peter Ackroyd and other commentators have credited the novelist with single-handedly creating the modern Christmas holiday. No, not the contemporary orgy of shopping, spending and ostentatious display. In A Christmas Carol, there are no Christmas trees, gaudy decorations or – apart from “the big, prize turkey” at the end – any presents at all. The only gifts exchanged are love, friendship and goodwill.

In one small book, Dickens changed the culture, inspired his contemporaries, and helped restore a holiday they were eager to revive.

More than a century and half later, A Christmas Carol is still a tonic for our spirits – and an annual reminder of the benefits of friendship, charity and celebration.

Good investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Thursday, December 16, 2011: Issue #1666

[Editor's Note: Independent Online reported on Thursday, "Hackers are bombarding the world's computer controlled energy sector, conducting industrial espionage and threatening potential global havoc through oil supply disruption."

Ludolf Luehmann, an IT manager at Shell Europe's biggest company, told the publication, "It will cost lives and it will cost production, it will cost money, cause fires and cause loss of containment, environmental damage - huge, huge damage."

In light of this chilling warning, along with recent developments on the latest super-bug, Duqu, we decided that Alexander Green's May article about cyber crime and cyber security was as relevant as ever. Alex has been pounding the table on cyber security stocks since 2009 and believes that 2012 will be the tipping point. Find out why he's so bullish on the sector below…]

Do you want to score big in the stock market? Then recognize an unstoppable trend and get on the gravy train before it’s too late.

In the 80s, for example, investors scored big in cable television and cellphones. Huge money was made again in the 90s on internet and technology shares. Commodities like oil and gas – and gold and silver – made investors millions over the past decade. Now an even bigger trend is emerging. Yet I estimate that not one investor in 10 has a nickel invested yet.

Consider this your wake-up call.

The internet was originally intended for a few thousand researchers, not billions of users who don’t know or trust each other. The designers placed a premium on ease of use and decentralization, not privacy and security. They never dreamed the internet would ultimately be used for trillions of commercial transactions.

And where there are great gobs of money, you will always find thieves…

Cybercrime Tops Physical Crime in 2011

Last year, for example, one out of every four companies had information, goods, or money successfully stolen by cyber criminals. (For the first year ever, the total cost of electronic theft actually topped that of physical theft.) Your social security number, personal history and medical information, your credit card numbers, even the cash you have in trusted financial institutions, are all at potential risk.

You may have read the reports a few weeks ago that Sony was forced to shut down its PlayStation network due to hackers who stole users’ information. Even top technology companies are often powerless to stop cyber crime. Sony recently admitted that it had already been hacked several times before.

This is not unusual. Companies are reluctant to admit that they have been violated by cyber criminals. Why? Number one, they don’t want to reveal their vulnerabilities to other potential hackers. Even more importantly, they are scared – and for good reason – that they’ll lose the confidence of their customers.

Yet that’s about to change. I expect the SEC to soon compel public companies to disclose their cyber-attack vulnerabilities. A group of lawmakers – including Jay Rockefeller, the powerful Chairman of the Senate Commerce Committee – has already sent a letter to the SEC asking it to issue guidance on cyber security.

The letter says, “In light of the growing threat and the national security and economic ramifications of successful attacks against American businesses, it is essential that corporate leaders know their responsibility for managing and disclosing information security risk.”

This is no idle threat. A 2009 study by insurance underwriter Hiscox found that 38 percent of Fortune 500 companies neglected to disclose the risk of data-security breaches in their public filings.

Capitalizing on Cyber Security

Does anyone really believe the SEC isn’t going to move on this issue? (Update: In October, the SEC announced that it was finally going to require more disclosure from companies on cyber attacks.)

The questions that you should be asking as an investor are, “Who is likely to benefit from this development?” and, “Where should I invest to capitalize on this trend?”

A small cadre of companies is working to protect consumers, businesses and government agencies against a wide array of cyber threats. Most of them are already highly profitable.

But tens of billions more of government money will soon be spent beefing up national security, protecting U.S. infrastructure and safeguarding the financial system. And businesses – increasingly aware that everything from research papers to client lists are being targeted by criminals and corporate spies – will soon spend billions more in this area, too.

This is a ride you won’t want to miss.

Good investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 12, 2011: Issue #1662

I’ve been a table-pounding bear on the euro for almost two years now. With each passing day, that currency looks more and more like a failed government experiment.

Painful, structural changes are needed – and the profligate Greeks need to be booted out. And, even then, the euro is likely to continue its decline against other major currencies.

But the euro, perhaps in altered form, will survive. So don’t believe the doomsters who say we’re headed for another world financial calamity like we faced in 2008.

Too many investors are nervously sitting on the sidelines, missing great opportunities in today’s market. If you understand how the euro crisis is a good thing, you can start making serious money again. Here’s why…

Aside from being Chief Investment Strategist for Investment U, I also oversee the investment decisions of The Oxford Club – an exclusive community of like-minded investors. As I write, we currently have 21 open positions in our Oxford Trading Portfolio. Our average gain on open positions is 36 percent, even though our average holding period is 197 days.

During this volatile year, we also stopped out of 17 other positions. Five of these were sold at a loss. The other 12 were profitable. Our average total return on these 17 trades was 21 percent. (By comparison, the S&P 500 is up two percent for the year.)

One of the reasons we’ve prospered is that we ignored all the macro-economic squawking from week to week and focused instead on finding great businesses selling at compelling prices.

“That all sounds well and good,” an investor told me the other day. “But what are you going to do when the Eurozone collapses?”

Despite all the gloomy forecasts, that won’t happen.

One of the main reasons is Germany. Officials and citizens there aren’t panicking about the problems in the Eurozone because, in some important ways, they see it as an opportunity.

Yes, problems there are serious. Greece is a complete basket case. Italy, Spain, Portugal and Ireland have too much debt, too. But their problems are more manageable.

Germany knows this – and understands what’s at stake in the Eurozone. Germany is a world-class exporter. Yet because it shares a currency with weaker nations, its currency is cheaper and so, too, are its exports. The currency union has been like rocket fuel for Germany’s exports.

However, Germany doesn’t want to be put on the hook for bailing out smaller, spendthrift nations. And the country is particularly sensitive to criticism that it’s attempting to dominate Europe politically or economically.

So Germany is hanging back, treating the crisis much as the Republicans treated the debt-ceiling impasse earlier this year. The Germans see this as an opportunity to secure important policy concessions rather than an emergency to be solved at all costs.

Who can blame them? German unemployment is seven percent and falling. Deficits there are coming down. Germans don’t want to dictate to other union members. They want them to take responsibility and make serious reforms to their unemployment insurance system, their healthcare sector and other pieces of the welfare state.

Politically, these measures will be tough to swallow. That’s why we seen so much leadership turnover in Europe lately. But the time for half-measures is over. Even Sarkozy had told French citizens the uncomfortable truth: The state is simply unable to provide existing generous benefits much longer.

Once Europeans understand this in their bones, the necessary reforms can be made. And then, who knows, Americans may get serious about entitlement reform, too.

So don’t expect a financial catastrophe in Europe. These problems are serious and will take time to work out. But the currency crisis is a much-needed catalyst for important changes.

Recognize that and you can return to world equity markets with confidence – and start meeting your investment goals again.

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657

In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…

I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.

Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.

Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.

My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.

“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …

For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.

If you don’t already own stocks, it’s tough to catch the train after it has left the station.

Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.

That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)

As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)

The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.

True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.

You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.

Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.

The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.

If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.

Good investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Thursday, November 24, 2011: Issue #1650

In December 1996, I sold some shares of Best Buy (NYSE: BBY) to offset gains elsewhere in my portfolio.

I still consider it the most boneheaded investment move I ever made. A year later, the stock was up more than five-fold. A few years further on, it was up more than thirty-fold.

The worst part is that I didn’t dislike the business prospects for Best Buy at the time. Quite the contrary, in fact. I sold it only because I had substantial capital gains and was cleaning out my portfolio to offset them.

I don’t always do that any more. And you shouldn’t necessarily, either. Despite what your tax advisor may tell you, you should never sell an investment for tax reasons alone. Nor do you have to.

Here’s why…

The IRS allows you to offset realized gains with realized losses each calendar year. If you do, however, you must wait at least 30 days before buying the same shares back. (Otherwise you run afoul of the wash-sale rule.)

Offsetting gains at the end of the year is often a sensible move. Most stocks aren’t appreciably higher 30 days later. And if you still like them, you can buy them back then.

There is a risk, however, and it’s called the January effect. The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested early each year. Plus, there’s often a rebound from the tax-loss selling that goes on each December.

If a stock you own soars in January, there’s a natural reluctance to buy it back. The temptation is to wait until it comes back down. But what if it doesn’t? You’ve taken a limited loss but sold an investment with unlimited upside potential.

There’s a way around this problem, however. And you can take advantage of it – but only if you’re willing to move this week.

In late November each year, I look at my entire portfolio for any companies that are trading below my entry price but NOT near my trailing stops. If I still like a stock, I often make the decision to double down on it for 30 days.

Why? Because I can sell the original shares at the end of December for a tax loss. And if the stock rallies in January, it’s not a problem. After all, thanks to my purchase in November, I own the same number of shares as I bought originally.

What if you don’t have the cash to double down on your position? Use margin. Again, I’m recommending this only for a 30-day period. Your margin interest charge will be minimal.

The risk, of course, is that your shares will be worth less in late December and you will have a paper loss on the second purchase.

However, just the opposite may happen. Remember, the January effect is often preceded by the Santa Claus rally, the tendency of the stock market to do well in the second half of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.

(The Santa Claus rally is never certain, of course, and another reason why you should only add to those companies whose earnings prospects remain strong.)

Bear in mind, when selling for tax purposes, the IRS requires that you buy those identical shares AT LEAST 30 days before you sell the others. So if you want to use this strategy for 2011, you must act this week.

If we have the traditional mid-December to early February rally, you’ll thank me. And then perhaps again on April 15.

Good investing,

Alexander Green