Four Ways to Protect Money During the Fallout

That sound you hear… it’s millions of Americans cracking their nest eggs.

Inflation is at a 27-year high while personal incomes are down 1.6% from last month. And the results are twofold: We have less money to spend. And we’re spending more for less.

Worse, that’s just one reason why one Wall Street analyst believes we’re "facing the prospect of a depression and the end of the American Dream."

This exclusive report reveals the two other economy-crashing catalysts and how they will drive the U.S. into recession. More importantly, it also gives four ways any investor can protect their money - even profit - before and during the fallout.

Three Reasons We’re Heading for Recession… 

The Three-Headed Monster - Congress, U.S. Treasury, and
The Federal Housing Authority:

Let’s be very clear about one point: The Fannie Mae (FNM) and Freddie Mac (FRE) bailouts were necessary.

These two institutions are the centerpiece of the American Dream - home ownership and a vibrant economy. If Fannie and Freddie collapsed, so would everything leaning on them. But the recent Housing and Economic Recovery Act of 2008 - passed through Congress and the Senate, and signed by President Bush at U.S. Treasury Secretary Henry Paulson’s urging in mere weeks - is the equivalent of lobbing a grenade into a gasoline warehouse.

The act will allow 400,000 homeowners in danger of foreclosure to refinance their mortgages into 30-year fixed-rate loans. The Federal Housing Authority (FHA) will back up $300 billion of these loans. Because all these folks need help, and because the FHA requires down-payments of only 3%, those who can refinance actually might do so instead of just walking away. Even more incentive: The FHA allows the down payment to be borrowed, gifted or provided by charitable organizations.

The FHA will end up with subprime and junk mortgages where the borrowers have "no skin in the game," and no upside incentive. Also, these troubled borrowers will have less incentive to repay. In the end, when those dead-end mortgages are abandoned, we the taxpayers will pay to bail out the FHA.

In effect, Congress, the U.S. Treasury and the FHA have elected to take out a subprime mortgage on the economy’s future - with already strapped taxpayers footing the bill.

Inflation

Inflation is so rampant that it’s gotten to the point where government reports say a 2.3% hike in consumer prices is "acceptable." Acceptable? Hardly. It’s absurd, especially since personal incomes are not keeping up with inflation.

As you’re well aware by now, gas prices have rocketed - climbing an astounding 26% in the past year alone. But less visible: the soaring price of food.

Kraft Foods Inc. (KFT) said its prices will jump by 12%-13% this year, and even as much as 25% in some of its cheese categories. Kellogg Co. (K), ConAgra Foods Inc. (CAG) and Tyson Foods Inc. (TSN) are also planning price increases.

Global chemical producer Dow Chemical Co. (DOW) recently raised prices on all 3,200 of its products, some by as much as 20%, in the single-biggest price increase in the Michigan-based company’s 111-year history.

The problem is going to get worse in the months ahead, as a survey by the National Association for Business Economics (NABE) has found that almost four times as many businesses plan to charge more for their goods and services next quarter than expect to reduce prices.

Ben Bernanke and the Federal Reserve

This one may be the most obvious choice, but it’s probably the biggest economy killer of the three. The Federal Reserve’s job is to masterfully manipulate the public’s perception of where interest rates are headed. It actually intended to gain and keep our confidence in its ability to stem inflation and strengthen the greenback. And it pursues these two objectives by simultaneously managing the direction of interest rates and working to keep the economy from dropping into a recession.

But as hindsight shows us, they achieved neither.

Instead, the credit crisis has blown our banking system apart. And the fallout from that explosion has smashed our entire capital infrastructure. If rates are lowered any further to stimulate growth, already troublesome inflation could escalate out of control.

And if the central bank actually raises rates to combat inflation, adjustable rates on mortgages will rise, setting in motion a whole new round of housing defaults… which will lead to an escalation of bank write-downs… which will torpedo stock prices… which will force institutional investors to liquidate holdings to raise capital.

The same will happen out in the marketplace, where companies with debt coming due will find it impossible to refinance, touching off still another avenue of defaults, losses, and write-downs.

So rates now have to stay put in order to jump-start these crucial liquidity flows and re-ignite demand. While it’s true that maintaining low interest rates will further fuel inflation, the Fed really has no choice. Better to keep rates low now - and believe that it can throttle back inflation later on.

Four Ways to Tame the Bear… and Profit at the Same Time 

No. 1 - Stock up on Dividend stocks

Many investors are so scared by the wild gyrations the stock market has seen of late that they’ve jettisoned everything in their search for safety.

Not only is this a massive mistake from a timing standpoint, it’s also a major misstep because of all the dividend income those folks are going to forgo.

Dividend-paying stocks tend to be more stable than their non-dividend paying brethren - particularly during rocky stock markets. In other words, stocks that have income streams attached are treated better, especially when the going gets tough. They also outperform non-dividend paying stocks by even more in down markets than they do in up markets.

By consistently reinvesting dividends during down markets, investors can substantially expand their asset base, which puts them way ahead of the game when markets recover and stock prices soar - as they always eventually do.

And the savvy investors who owned them watched as their own portfolios easily outperformed the market averages and roundly trounced the returns of portfolios that were devoid of or light on dividend-paying shares.

And there are some excellent investment candidates. Two of the best are the PowerShares International Dividend Achievers Fund (PID) and the Alpine Dynamic Dividend Fund (ADVDX), two exchange-traded funds (ETFs) that we like a great deal.

The PowerShares International Fund is a global-income portfolio that can help you spread your risk, while also earning income. The Alpine fund is a more-specialized fund that uses a "dividend harvest strategy" that can boost the fund’s yield.

Both funds invest in companies that have survived countless business cycles, and that are likely to survive this downdraft, too.

Because dividend-paying stocks tend to be downdraft resistant, portfolios with higher yields tend to last longer and pay stronger. That’s something that’s important to all of us, but especially to investors who are nearing retirement, or who have already retired.

No. 2 - Go For Gold

When times are tough, gold soars.

And frankly, the economy has been tough: $4 gasoline, the housing crisis, rampant inflation, plummeting stocks… But all the while, gold prices vaulted a cool 26.5% in the past year.

Missing out on gold is already costing investors a pretty penny. What’s more, most experts are forecasting gold prices to rise at least another 75.6% by the end of this year. So, how does one profit from gold? It’s simple. You don’t have to wade through a plethora of flashy websites offering bullion or risk it all on a junior mining company.

Instead, here are five ways to profit from gold right away - from the most lucrative to the least risky.

Gold Fields Ltd. (GFI): South Africa’s Gold Fields Ltd. is the world’s fourth-biggest gold producer - with about 90 million ounces in reserve from its operations in Africa, South America and Australia.

It recently reported that its fourth-quarter production would beat its previous forecast by up to 120%. Overall, the company has a solid balance sheet and ample reserves. But if anything scares investors away, it’s Gold Fields’ location.

South Africa mines are frequently a political tool between the country’s labor unions and state-owned utility provider Eskom Holdings Ltd. (ESKAY), which controls 95% of the country’s power. Eskom recently jacked electricity prices up 27.5%, and unions decided to hit the government where it hurts - by striking - thus gutting the government of taxes from its vast gold profits.

That is just one example of why this stock is a risky gold play. Gold could reach another record but Gold Fields may not see a penny of it if its miners are on strike.

Yamana Gold Inc. (AUY): When gold prices are high, investors should pay extra attention to mining companies with increasing production levels because they translate into a bigger bottom line.

For its second quarter this year, Yamana Gold Inc. produced almost 10% more gold than it did in the previous quarter. What’s more, its gold production is expected to double to 2.2 million ounces per year by 2012, primarily from its Brazil and Argentina mines. That’s because Yamana Gold went on a spending spree in the past two years, buying up junior mines around the world to lock in reserves.

"Now it is about production, cash flow and earnings," Chief Executive Officer Peter Marrone told Reuters. It’s also about dividends. The company recently kicked up its investor payout by 300%, a strong vote of confidence to its production and stock performance.

Barrick Gold Corp. (ABX): Like Yamana, Barrick Gold Corp. has also been on a spending spree. Over the past year, it has gobbled up stakes in a half-dozen mines, multiplying its reserves and production capacities in light of record gold prices. All totaled, Barrick owns 27 mines in five continents and produces over 8 million ounces of gold a year, making it the world’s largest gold miner.

We consider this a medium-risk investment because - despite its solid operations, profitability and efficiency - it’s vulnerable like any tradable stock.

But since it’s the world largest gold producer, its stock will move closest in line with gold compared to other gold miners.

And as an added bonus, it just kicked up its biannual dividend by 33%.

SPDR Gold Trust (GLD): Some investors want to buy gold but feel uneasy about storing it overseas, by another person… and for a commission nonetheless. But at the same token, not many want to make their homes a burglary target by stashing gold reserves in their basements.

Enter SPDR Gold Trust, an ETF that trades like a stock, but whose value directly tracks the price of gold bullion. Only 1.82 percentage points separate the gains made by gold price and Gold Trust in the past year.

Gold Trust has a $17 billion-plus market cap, giving it ample liquidity. Simply put, it’s the easiest way to buy gold without buying physical bullion or coins.

EverBank Select Metals Account: EverBank Select Metals Account has a minimum deposit that is 98% lower than its competitors, and its commission costs are up to 86% lower than other metals brokers and bullion banks.

Second, it offers two types of gold accounts:
Unallocated: Your purchased gold is pooled with that of other investors, eliminating storage and maintenance costs. The minimum deposit amount for unallocated accounts is a scant $5,000.
Allocated: You directly own the gold you purchase, held in your own private account. The minimum deposit for allocated accounts is $7,500.

Both types of accounts can be set up 24/7 online. But if you prefer the phone, call 866-326-6241, and be sure to give them the code 12608 when setting up an account.

(Disclosure: We should point out that the publisher of Money Morning has a marketing relationship with EverBank, but that’s because its products are best in show.)

No. 3 - Grab the "Global Titans"

There are a handful of companies that are either located in, or focused on, overseas markets that remain poised for growth - even if the U.S. market slows down. We call those companies "Global Titans" because they usually derive a hefty portion of their sales and profits from outside U.S. borders.

The old adage that "when the U.S. economy sneezes, the rest of the world catches a cold" is becoming increasingly less valid, due to an economic process known as "decoupling." This means that - eventually - such economies as China and others will be able to show respectable growth, even if the U.S. economy slows down or even drops into a recession.

In the immediate term, even the partial decoupling we’ve seen means that these other economies could continue to grow, even if we get mired down by the housing meltdown, subprime crisis and ensuing credit woes.

While those markets may take a near-term hit because of the maladies of the U.S. economy, their longer-term growth is much less dependent than ever before on the U.S.-centric model of the global markets.

And Money Morning has identified a portfolio of Global Titans whose quarterly earnings and stock prices are laughing in the face of the gloomy U.S. market: The Coca-Cola Co. (KO), PepsiCo Inc. (PEP), Diageo PLC (DEO), Yum! Brands Inc. (YUM), McDonald’s Corp. (MCD) and The Boeing Co. (BA).

No. 4 - Relax, Breathe

No one knows how long this economic vortex will last, but two things are dead certain:

• We’ve been here before.
• No matter how bad it gets, it will pass.

So far, we’ve gone through the Price/Earnings (P/E) Ratio peak crash of 1901; the Great Crash of 1929, the "Black Monday" stock market crash of October 1987, the Asian Contagion of 1997, loan defaults in South America and Russia, and even the 9/11 terrorist attacks.

And not only did we survive each; our economy rebounded to become bigger, stronger and leaner.

Original post

Comments

[Y.I.]

This is garbage: until they recently started cancelling their dividends, "dividend paying stocks" meant financials. Similarly, gold isn't doing well, and in a deflationary environment -- which we'll probably be in soon -- you want to own nominal assets like bonds, not real assets like gold.

[istartedi]

even after all this carnage, PID is yielding 4.15% based on trailing numbers. You're better off in a short-term CD. If you can afford to average down a number of times over the next year, diversified junk bond funds will yield a lot more, and the averaging down will reduce your risk.

[Capt.Bomblast]

Gold and (especially) silver are a fan-freaking-tastic way to protect your money... ALWAYS! Buy precious metals, take physical possession of them, protect them. What ever happened to a free market? We would not be in this mess if we had decided to live within our means and not allowed the banks or Federal Reserve to dictate to us the value of our currency... isn't that for US to decide? Take back your Liberty! Trade in your FRN's for gold and silver!

[Chris B]

Precious metals and other commodites will revert to the mean just like the other "can't go down" investment - real estate - did. Remember how real estate used to be considered the best investment for an inflationary environment? Given the volatility and historically peaking prices, I'm not sure why this would be included as a way of "protecting" money - it's more of a speculation, just like pork bellies or oil. Speculation is fine, but don't sell it as safe.

Muni bond funds are yielding around 6% right now. Might that be a more conservative option for "protecting" money from 4-6% inflation than risky commodities futures?

Also, the "global titans" and dividend stocks have fallen as hard as the rest of the market. Why should they be considered safe?

[wes mantooth]

Inflation? Commodities are getting creamed and Treasury yields are getting crushed. It's not inflation. It's credit destruction on a global scale. Deflation.

[Rhett]

Don't bet on munis, ChrisB. Some of them are already insolvent.

[bearfund]

How about a new rule on SA: no one is allowed to post an "OMGZ it's DEFLATION!!!111one&quo... post or article unless he or she has at least 50% of his or her net worth in gold puts dated no earlier than 2010. If "deflation" is such a slam dunk you should turn at least a 5x profit on such a position without taking any risk at all.

In fact all of you deflationistas are committing both of the cardinal sins: you are arguing with the tape and you are fighting the Fed. So put your money where your mouth is or shut up. The author is largely correct although I would not bother with stocks at all and would instead short the Long Bond for the perfect hyperinflationary duo.

[Chris B]

Rhett,
Some of them are always in default, even in boom times - just like corporate bonds. A diversified fund is probably safer than an individual issue. If you're worried about increasing defaults, TIP might be a better bet. The really frightened can go into CD's and earn 3% with FDIC insurance.

I'm gradually buying stocks in this market because I have a 10+ year outlook. My issue with the author is that he is selling stock and commodity investing as a way to "protect" money from losses. Investors looking to retire or pay for college within 10 years need to "protect" their money by not being in stocks or commodities. That's old-school common sense in a world where stocks can decline for a decade at a time and commodities can decline for two decades at a time! Bonds are the way to allocate most of your portfolio if you have a less than 10yr horizon.

[Rhett]

I'm in short-term Treasuries. Really scared.

[Jake2]

"Dividend-paying stocks tend to be more stable than their non-dividend paying brethren - particularly during rocky stock markets." Pray tell then, what is an investor to do when the dividend is cut and the price of the stock falls (precipitously) at the same time? 'Twould be best to be out of the stock, I believe.

[Capt.Bomblast]

Investing in gold and/or silver is not so much a way to make a profit... nor is there a real chance to lose 'money' on your 'investment'. Investing in metals is a way to maintain your purchasing power when the dollar is dropping. Y'all need to stop thinking in terms of profit for a while and be content in holding on to what you have.

[wes mantooth]

"How about a new rule on SA: no one is allowed to post an "OMGZ it's DEFLATION!!!111one&... post or article unless he or she has at least 50% of his or her net worth in gold puts dated no earlier than 2010. "


How about a new rule on not assuming you know what someone's invested in. I own gold. But even if I didn't why would I short gold anyway? It holds it's value due to it's flight to safety quality alone. Every time the VIX kicks up so does gold. As soon as the panic dies down so does gold. This time will be no different.

[gollwoods22]

the global titans approach is pretty appealing as the BRIC countries and Asia in general use thier reserves in an effort to invigorate internal economic activity. they are left with no choice but to rely on themselves now that the west is going into recession for awhile.

[Pangaea]

I too am unimpressed with the dividend funds reco'd here... The statement "dividend-paying stocks tend to be more stable than their non-dividend paying brethren - particularly during rocky stock markets" seems almost comical when the two "excellent investment candidates" recommended here are off their highs by far more than the market at large.

In addition, the Alpine fund is panned as "gimmicky" by Kiplingers:

www.kiplinger.com//col...

Try again?

[Mr.G]

those who are saying gold is a no go in deflation are dead wrong - you can buy more commodities at todays gold price than you could with gold at a1000- the spread between gold and other commodities is growing - there is serious support in gold prices(many are taking physical delivery or storing it) and any inflationary pressure is sure to push prices up(probably at a faster pace than other commodities because demand will remain low ) -gold is a winner

[skynar]

why isn't the gold price skyrocketting now? in fact, its falling. can u explain why? those dividend paying stocks will not be so when their next earnings come out.

[wes mantooth]

"why isn't the gold price skyrocketting now? in fact, its falling. can u explain why?"


Skynar it's called a deflationary spiral. Gold will skyrocket after real estate bottoms and banks stop failing. Until then stick to cash and treasuries if you're a conservative investor.

[Capt.Bomblast]

skynar: The gold price IS falling... sometimes. It's my feeling that there is some kind of crazy manipulation going on. What's happening to the metals -across the board- doesn't make any sense... the dollar gains... gold gains at the same time... and oil goes down. SOMEBODY is pulling some strings (banks?). Things are so volatile. It's all the paper game... when folks call in their metals and want to take physical delivery, I think you'll see that it's not there for them. They've been tricked into believing they actually own something, all they own is paper. Give it some time to work it's way out and you'll see the true market value of precious metals.

[bsharvy]

Source? "What’s more, most experts are forecasting gold prices to rise at least another 75.6% by the end of this year."

No mention of staples or health care.....

[bro]

I just bought AUY. Does anyone think it is undervalued?

[Little M]

Does the recent way the gov't (recent, try the past 40 years but 20 in particular)has been systematically finding ways to collect tax money and spend it in ever increasingly large chunks in ways that are just so stupid, most of us were voicing the opinion to not pass the recent bailout? That one just completely pissed me off, to allow the regulator BArney Frank anywhere near the bill to bail out the financials who made their own bed of gnasty with the regulators right there every step of the way doing nothing at all but skimming from all sides. So far they have done nothing but throw good money after bad with the same result every time they do it. More money us American tax paying citizens get stuck paying. Well...
It makes me want to go to washington DC and just find a group of our elected officials and begin uncontrolably vomiting and spewing monumentous amounts of chunk all over them. I would hope this impossible feat would I be able to maintain for at least 10 whole minutes. Chasing them and spewing ridiculous amounts of bile and spunge clods upon their heads and persons completely and thoroughly soaking all who have ever written in an earmark or subsidy or a handout to a lobbying group all the way through clothing to the skin with puke. I think that might make alot of us feel better and would get the message across that we as a Nation are fed up with how our lives are being ruined by their innane repetitous inept (but carefully planned to benefit them) policies that do not help anyone in this country without it benefitting them first. Yes they make me sick. They should do the same to you and I hope I see you there vomiting your spew chunks of partially digested cottage cheese and omlettes with bell peppers upon another many shamefull disrespecting politicians. Do it at the local and state level too cause those idiots have been copying Main St. all along. Puke Puke and puke some more. Tell them what you really think and feel. Let them feel it too!

Barf for change. Barf for change. Barf for change. Barf for change.
?:^O> lwolbrrrrgrrggrgaburrg... ?:^O>
Barf for change. Barf for change. Barf for change. Barf for change.


My name is Matt and I approve this message....gluuurrpuhd...

[mwswi]

So many opinions and so many contradictions. This commentary is all over the place. The truth of the matter is that nobody knows how this mess is going to play out. The commentary on this page only proves it.