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Weekend Edition

The Best of The S&A Digest
Saturday, December 6, 2008

 Jeff Clark has discovered another way to make "free money" by selling covered calls. This strategy involves buying a low-risk value stock at a bargain price and then selling someone else the right to buy the stock at a higher price. And right now, with stocks so beaten down and option prices so expensive, you can lock in huge returns.
 
The market literally has dozens of opportunities to make free money right now. Jeff just told his Advanced Income subscribers about a 120-year-old company trading at less than five times earnings and paying a 7% dividend. Selling covered calls on this stock will generate a 13% return over the next six weeks. This is your last chance to get in on Advanced Income before the price goes up. For the details, click here.
 
 In terms of historical trendlines and past bubbles and busts, it's reasonable to assume the S&P 500 is near a bottom, or perhaps, may have bottomed. But the S&P is trading at just over 16 times reported earnings – its 100-year average. So by the S&P 500's ratio of price to reported earnings, stocks aren't cheap at all, and it's not reasonable to assume the bottom is in.
 
My guess is still that bottoms don't feel this good. We won't get a bottom until the current generation is entirely disabused of the notion that it's easy to get rich in stocks.
 
I recommend reading the introduction to Lawrence Cunningham's book, How to Think Like Benjamin Graham and Invest Like Warren Buffett. The introduction is an important little essay called "The Q Culture." Q stands for quote, as in "price quote," with which the great unwashed herd of "investors" is utterly obsessed.
 
When that obsession turns to revulsion, perhaps we'll see a bottom. But here's the point: Forget about the bottom. It's a fool's obsession. Instead, be a lifetime buyer of quality equities and buy them based on valuation. When the valuations on stocks like Coke, Microsoft, UPS, Altria, and other great businesses get this cheap, you don't waffle about bottoms. You buy them and hold on to them with great conviction.
 
 According to the Wall Street Journal, Morgan Stanley may go on a regional bank buying spree to increase its deposits after converting to a bank-holding company two months ago. Goldman Sachs and American Express also converted to bank-holding companies and also need to shore up deposits.
 
This should lead to an onslaught of regional bank takeovers in the coming years. We've already seen Wells Fargo buy Wachovia, Bank of America bid for Merrill Lynch, JPMorgan buy WaMu and Bear Stearns, PNC buy National City, and Citigroup bid for Chevy Chase.
 
What's the best way to play this upcoming trend? The SPDR KBW Regional Banking Fund (KRE). It's down 29% this year and yields 5%. Billionaire vulture investor Wilbur Ross owns a big chunk.
 
 We've recently been writing about upcoming bankruptcies in the highly leveraged REIT market... and General Growth Properties (GGP) is the poster boy. GGP is the second-largest mall owner in the country, owning and managing more than 200 malls.
 
The stock has fallen more than 97% in one year, and the company was spiraling toward bankruptcy. But it got a lifeline last weekend... It won a two-week extension to pay a $900 million debt. Two malls in Las Vegas, one of the worst real estate markets in the country, are pledged as collateral. GGP is clearly trying to delay the inevitable.
 
 Citigroup is jumping on the gold bandwagon, calling for the precious metal to hit $2,000 an ounce within two years. The bank says the government's liberal money printing will either cause inflation or depression followed by civil disorder and possibly wars.
 
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop."
 
Fitzpatrick also said gold traders are watching reports from Beijing that China is considering boosting its gold reserves from 600 tons to 4,000 tons to diversify away from paper currencies.
 
Steve has found one unusual investment that soars just after gold's price rises. Last time conditions were this good, it went up 665%... and it's beginning to soar again right now. Click here to learn more.
 
Regards,
 
S&A Research




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