05:39:23 Start of Tape

2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM

[BEGIN AUDIO]

RICHARD BAND: This is Richard Band from Profitable Investing, and welcome to another in our series of webinars for you. We have got I understand 460 people with us this afternoon. We’ve received hundreds and hundreds of questions. So there is a lot to cover today, and I wanted to welcome you all to this session. You notice we have started at 6:00 p.m. Eastern Time for this session because we thought maybe a start a little later in the afternoon would make it easier for some folks who are coming home from work or maybe even taking a little time off in the afternoon on the West Coast. Welcome to all. This has been an exciting day in the markets. And we’ll talk a little bit about what’s happening specifically, what happened today, and what’s going to be happening in the next few weeks and months in this session.

The Dow Jones was up 180 points at the close, and we had an opportunity for about 13 minutes in the last hour of trading today to make some of the trades that I had recommended in our November issues, specifically the sale of Hewlett-Packard and Target. As you know, the market rally this afternoon was traced back to stories that the nations of France and Germany have agreed to boost the Euro Zone Rescue Fund from 440 billion Euros to two trillion Euros.

How is that for shock and awe, but we will see whether that will actually work or not. And we’ll have a few comments about that during this session. We will be online here for about an hour, and if you do need to leave feel free to do so. We will have a transcript and an audio version of the webinar online within a few days that you check at our website. So you are not going to be missing anything if you have to take a break for dinner or to commute or whatever it may be.

But stay as long as you can, and we will answer the questions in the order in which they came. I received over 500 questions yesterday. So I can’t promise we’ll answer all of them today.

But I will tell you one of the questions I received was when am I going to retire. And I guess the answer to that very simply is that I’ll retire when I’ve answered all of your questions. So with that thought in mind, let’s go on to our subject today, which is Profits and Pitfalls in 2012. We are thinking ahead as the markets always do. You know, 2011 has been kind of a volatile year with a lot of ups and down, but we are always looking ahead to what’s down the road, and that’s the 1 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM important thing for us as we look into Election Year 2012. There are some clouds on the horizon and, of course, the biggest as you know is the European sovereign-debt issue. It is far from resolved despite the news from France and Germany today.

You notice how whenever they come out with these little tidbits the prime ministers or the finance ministers, they leave some details out, and I think there is a reason for this. The sovereign-debt problem in Europe is enormous. They are talking about now two trillion dollars worth of bailout money for Europe. What that is telling you is that the European nations have gotten themselves way in over their heads in debt. This is government debt no, sovereign-debt and it is going to take years to resolve these problems. So I wouldn’t put too much stock in this announcement that we heard today. It’s positive, it’s hopeful. It’s probably a plus for the stock markets of the world over the next month or two, but the problems are far from resolved.

Furthermore, in 2012, we are going to have grapple with some other issues. We already know that China is in a slowdown, and the question is will it become something worse than that.

I don’t really have a strong feeling about that matter. It certainly seems as if Chinese stocks have come down a long, long way in the last 18 months or so. And possibly the have already discounted, as we like to say in financial lingo, discounted the slowdown in the Chinese economy that appears to be underway. But if something happens in China let’s say a major banking problem, a major banking scandal arises in China and it turns out that the Chinese government has to use a lot of its own money to solve some of their issues, and domestic issues over there rather than contribute money to let’s say a bailout fund for the Western nations. Why in that case, China could actually become a drag on the world economy. So that’s a big question mark in my mind. Then finally, there is this issue of the U.S. Recession risk.

We are skating on thin ice right now. We’re in the stage kind of a twilight zone between growth and recession. We’ve been in this situation before. We’re not in an actual recession where the economy is contracting, but we are growing very slowly at perhaps 2% a year on GDP.

And when you get into a stage like that as we did in 2007 and as we did in 2000 and 2001, as we did in 1989 and early 1990, when you’re in a very slow growth situation, it’s easy to tip over into 2 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM recession. So these are some of the clouds on the horizon, and I am watching them with a very cautious eye at the moment. Now, this will probably be some time in 2012. For now, this is the good news. We always like to put the good news up front as close to the front as we can.

The good news is that we’ve got a year-end rally on Wall Street underway, and here is a nice little chart showing the percentage of New York Stock Exchange common stocks that are trading above their ten-week moving average. That’s a good short-term indicator of the market’s health. And you can see that this was as of Friday. I haven’t seen numbers yet for today’s close, but they should be around the same level, maybe a little bit higher, about 54% or 55% of the New

York Stock Exchange issues were trading above their ten-week moving average. We’ve had a nice lift off on those lows at the beginning of October. We still haven’t reached the highs by any means that were reached in July. That’s the first oval you see, the left oval on that graph where the indicator got up to about 76%. We’re still in the 50s right now.

So I think this rally has a distance to go, and it’s hopeful and it’s encouraging and I hope you own some stocks and you’re celebrating every uptick that the market is giving us right in here. So this is something to be grateful for, and to participate in to the extent that we possibly can. But looking ahead to the primary trend where we are now in terms of the big picture looking at this now, this scene from a little higher up. Perhaps we could call this the 30,000 foot view.

This is a monthly stochastic indicator, and basically the month stochastic looks at where the market has been in the 14 months. This is the Standard and Poor’s 500. On a scale of zero to

100, it tells us how close we are to the top of the range or to the bottom of the range that we’ve been in for the last 14 months.

And as you can see from that last tick on the chart, we had a steep drop in this stochastic indicator, which is a great indicator of the major trend, the primary trend behind the market. It had a big run up in 2009 and 2010, and into the spring of 2011. It got over 90 on this indicator, and has now fallen back as of the end of September into the lows 60s. Now, I could have taken this chart back a lot further to the end of World War II, and you would have seen that the indicator has never fallen as low as it has to this low 60s level from above 90 to the low 60s. It has never 3 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM fallen this low without indicating that there would be further erosion ahead. Now, we did have one little turnaround there in late 1998, and I have that indicated for you with an oval there, a circle there in 1998 during the Asia crisis.

Yes, the market did go down sharply for a couple of months, and the indicator came almost as low as it did this time and then bounced sharply back up. But that was the 1990s when we had a tremendous tail wind behind us. People were eager to buy stocks. I would not bet on an exception to the rule this time. The rule generally speaking is that when this indicator goes up as high as 90, it turns around, comes back down to where we are now in the low 60s, it keeps going lower. And that would suggest to us that there will be lower lows on the market some time in 2012. I wish I didn’t have to bring you that news, but them is the facts, folks. That’s history. So the odds are that we will see somewhat lower stock prices in 2012 based on just what is happening with the primary trend. But we are on a little rally now, but watch out for 2012.

Furthermore, and I won’t beat this one to death because I’ve shown you this chart over and over for I think it’s been the last 14 years. So I’m sure you’re getting bleary eyes looking at it.

But we’re headed into a demographic tsunami or buzz saw or whatever you want to call it. We have in the United States and in most industrialized nations a rapidly aging demographic.

This chart shows us the ratio between prime savers; those are people in the 40 to 60 age bracket versus those who are over 65. The prime savers, the younger people 40 to 60 are in the numerator at that ratio. The denominator you have the people over 65, and you can see that the ratio, the year-to-year change in this ratio has been falling since 2001. This demographic in itself explains most of the stagnation that we have experienced in the U.S. stock market and in other developed economies since 2000. It’s very simple. We’re getting older. People are turning 65.

They’re drawing down their stock holdings, and as you can see from the red arrow what happens in 2012? Yikes, a big drop.

The year-to-year change dips into its most negative territory since the turn of the New

Millennium, and will be in a very low territory right through 2015 and 2016. So this is a problematical period we are headed into, and I think it’s important for people especially those who 4 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM are nearing retirement. Those who are in their late 50s or early 60s thinking about retirement to be prudent, to be cautious and to preserve capital during especially 2012 but also in 13, 14, and

15. We will eventually come out of this hole. Eventually, we will come out of this hole once the

U.S. Government and other governments, France, Germany, Italy, Spain have resolved some of the problems they are facing, fiscal problems caused by the demographic bulge, the baby boomers who are moving into retirement years. Something will have to be done about the entitlement issues. And it will be done I think over the next two or three election cycles here in the U.S.A., and by 2016 we should be at least at the bottom of this and maybe coming out the other end. I certainly hope so.

Now, my next chart and I want to give you some long-term perspective here because it’s important for us to hang and not give up here, and to realize that this long period of stagnation and some people call it a secular bear market. I prefer to call it a secular long-term stagnation cycle. And this chart, this is from Doug Short, by the way. I would encourage you to take a look at his website. He is a real charts and graphs at dshort.com. And he can give you kind of a scare because he tends to paint things in a rather gloomy light, but here let’s look at the facts. Just look at the facts. What Doug has done for us in this chart is to overlay at the blue line, which is our

Standard and Poor’s 500 since the year 2000 over the Nikkei Index from their top in 1989 and the

Dow Jones from 1929. He has expressed all of these indexes in real terms that is adjusted for inflation so that the monetary pledging funny business doesn’t affect the chart.

And you can see that there has been a remarkable correlation especially between the

U.S. 1929 experience and the U.S. experience since the year 2000. We are very much following the same pattern, and look at what happens next. You see where years 2012 and 13 are the bottom of the scale there, the X-axis there years 12 and 13. Well that corresponds to 2012 and

2013. And if this correlation remains in effect, it would suggest that we have a bear market coming in 2012, maybe the end of 2013. And it could be, if we’re lucky, it will be the final blow for this secular bear trend, the three bears, a third of these great secular bear markets, 1929, 1989

5 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM for Japan and now the year 2000 for us again in the U.S.A. But a third of these bears could be over by 2012, 2013. That’s what I’m hoping.

The Nikkei doesn’t give you a lot of encouragement. If you look out to the right of that chart, the Japanese are still struggling after a long time. But in the U.S.A. we finally managed to put the Depression behind us in the late 1940s and I’m hoping that we will be able to put this little silent depression behind us some time in the next two or three years. That would be my bullish scenario. But I have to recognize from this chart that it could take most of this decade for us to get out of the hole, and start building another period of prosperity for our country. I hope to live to see it in my retirement, and most of all I hope that my children will prosper from the great bull market that made so much wealth for me and for you I would assume also in the years 1982 to

2000. We had a great run there. I think there will be another run like us for those of us who live long enough to see it and especially for our children and our grandchildren. That is what I am looking forward to, bit first we have to get through 2012.

At the next major bottom how will you know that we have hit the next major bottom? I’m going to give you a shocking prediction. Some of you may remember when I spoke at one of the money shows in 2003, I made a prediction that caused everybody to gasp in the room. I told people that I thought General Motors was going to file for bankruptcy. Not immediately but within a few years would file for bankruptcy. The reason I gave was that GM had revealed a fatal flaw in its business model at that time in 2003. They had issued $10 billion worth of bonds to shore up their pension fund. And I told the audience at the money show at that time GM was revealing a major weakness in their business strategy, the business model because they could not fund their pensions out of cash flow, out of operating cash flow. They needed to borrow money. That was a fatal sign.

Now, what is the delusion, if you will, the fatal flaw in the business model of these two great companies, especially Apple and Google that I put up here on the screen? Because I think they will tell us when we’ve reached the next major bottom. Now these are great growth companies, and I’m not saying that Apple and Google stock are going down immediately, 6 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM although Apple did take quite a hit this afternoon. Even though they had a pretty good earnings report, but it wasn’t as good as Wall Street had hoped. On the stock it took quite a hit. Now, for years Apple and Google and at one time Microsoft and Digital Equipment and so many of these technology companies have told us look, we don’t need to pay dividends. Now, they have never really said it in quite these many words, but this is what they the were telling us. Our business model is based on satisfying the customer, which is good, and our employees. And if we satisfy our customer and our employees, keep them both happy, the shareholders will take care of themselves.

Now, that’s a great philosophy during a bull market, during a major mega bull market. It’s a terrible philosophy during a bear market. Microsoft got the point a couple of years ago and started issuing dividends. So did Intel and you notice Intel stock took a nice jump today in after hours trading partly because the stock is well supported by dividends. My suggestion to you is that the next major bottom for the market may be in 2012 or 2013 Apple will declare a dividend.

They’re sitting on billions and billions of cash. They don’t need that cash for business purposes.

They should be at least buying back stock and probably should be paying a dividend, too. I think

Apple and maybe even Google will declare dividends near the bottom of the next bear market.

Make a note of that and remind me of it when we get close to the market low because I think that is going to be a sign that the market is ready to turn in a big, big way.

All right, what’s your best strategy now? I see we’re here at 6:20 Eastern Time and I get a few more minutes. We’ll have to get through these slides before I take your questions. But let’s talk some nuts and bolts here. We’ve talked a little bit about the outlook and that’s all fine, but the important thing is what are you going to do about it? And here are some practical steps you can take. In fact, everything else now for the rest of this presentation is going to be practical what to do now. It’s like advice. I’m not just forecasting. So your best strategy now is first of all emphasize capital preservation. Yes, it’s great to make some money. You can make some money in this rally, but always keep an eye on what is coming up behind you. How do you preserve capital? Well, this is how you do it. 7 2011-10-18 17.59 Profits and Pitfalls in 2012

First of all, with regard to the stocks and bonds you own or that you may be thinking of purchasing in the next couple of weeks or the next few months, boost your current yield. That’s what you want to be doing in the next two or three months. As this rally rolls on, you want to be taking some profits on your stocks that don’t pay much in the way of dividends. Take some of those profits on Treasury Bonds. I hope you’ve been doing that while the yields have been so low. Move out of those things and move into things that are paying more in terms of current yield, stock dividends, bonds yields. That would be corporate bonds for example or emerging markets bonds that pay much more than Treasuries. And gradually in an overall sense you are going to want to shift more of your asset allocation towards fixed income. We are probably going to end up in our model portfolio with something like 50% stocks, 50% fixed income by the time this is all over. Why not 100% in cash? Well, there are too many issues with that. You can make terrible mistakes, terrible timing mistakes if you try to go 100% into cash.

But I think you’re going to find with the things that I recommend to you the high yielding stocks and bonds you will be well protected during any turbulence that may be coming in 2012.

Yet, you will have enough reserve on the side so that when the great buying opportunities do come, as we hope they will come, you will get a chance to put some of that cash to work. Now, for people who are a little more aggressive, there is that option that you can hedge your downside with the bear funds that we’ll talk about. That’s something that a number of people will want to do in my audience, but it’s not for everybody and it is optional. Notice I mentioned it is optional. It is not a requirement that you hedge your down side. As long as you are shifting to a more conservative asset allocation, something you can sleep with and live with, then you don’t need to get into any kind of fancy hedging techniques.

All right, let’s look at a couple of those bonds. I said earlier that the Treasury Bonds are not attractive with the ten-year yield at 2.2% or something like that. Treasury yields are not attractive right now. Here are two areas where I think you can still find value in the bond market.

One would be in the emerging markets whether you buy a no-load fund like a TCW Fund, or a closed-end fund trading on the New York Exchange like the Western Asset Emerging Markets 8 2011-10-18 17.59 Profits and Pitfalls in 2012

Income Fund. I talked about both of those in our November issue so I hope you will take a look at them. I have explained what the difference is between the two of them. They’re both yielding over 7%. So 7% gives you a big leg up over a Treasury Note that is paying on 2%. Seven percent is very attractive and the emerging markets as you know have greatly improved their financial standing in recent years. This is not the type of emerging market world that we are talking about that existed in 1998, for example. Those days are gone.

The emerging markets are in much better shape. I would also put a little money into a conservatively managed high yield corporate fund like the Vanguard Fund listed here yielding again over 7%, about 7-1/2% actually and the reasoning here is simple, and my calculations which are very conservative. Let’s fact it, I’m not one of these Wall Street pie-in-the-sky guys.

My calculations indicate that the stock market ought to return an index fund, let’s say, the

Vanguard 500 Index Fund ought to return something like 7.3%, 7.4% compounded over the next ten years. With the Vanguard High Yield Fund, I can get that much right up front. So if I can get my return right up front, why should I put so much money into common stocks where there is all of this crazy volatility? That’s the reason. Get as much of your return up front as you can. A bird in the hand is worth more than I don’t know how many in the bush. So go for the return up front, and especially if you’re headed into retirement. This is very important.

The other prong of the strategy is with regard to your stocks. You want to buy highest high yielding safe dividend paying stocks, companies with a record of raising dividends year after year after year. Now, unfortunately a lot of other people are discovering this insight and have been bidding up the prices of many of these things. So you’ve got to be a little more careful right now about what you buy. You’ll notice from this slide that I’ve got two healthcare companies and healthcare is one area where you can still find a fair number of good high yielding stocks with great records of dividend growth over the years. Abbott Laboratories has increased its dividend

39 years in a row. Johnson & Johnson has done so for 49 years in a row. So these are great rock solid companies. Abbott is a buy up $52. Johnson & Johnson, which is in our incredible dividend machine, is up to $64.60. Abbott is yielding 3.7%. Johnson & Johnson 3.5%. 9 2011-10-18 17.59 Profits and Pitfalls in 2012

So you are already earning as much as you could earn with the longest dated Treasury

Bond out there. If you lent your money to the U.S. government for 30 years, you couldn’t earn more than you could with these wonderful dividend paying stocks. And within five or six years, they will have increased the dividends much beyond the 3-1/2%. Now, it will be more like 5% and if you were sitting on that 30-year Treasury, you might be sitting with a low yield for the rest of your life, and perhaps even some capital losses if the interest rates start to rise again. I would definitely buy Abbott and Johnson & Johnson in here. Abbott at $52 or less. I see it ticked a little above that today, but let’s try to buy that on a $50/$52. Pepsico at $65 or less. I’ve been beating that horse for quite a while lately. But the thing I really like about Pepsi besides 39 consecutive years of dividend increases is that Pepsico more so than Coke. I like Coke but more so than

Coke Pepsico is trying to rejigger its business model so that more of their products appeal to people who are concerned about good nutrition.

This is something a little hard for Americans to grasp because we’ve eaten junk food for so long. But especially in places like Europe and emerging markets, consumers are a little more attuned to what’s good for me to eat. These are folks especially in the emerging markets where until recently they didn’t always get enough to eat let alone what was good to eat. And so, nutritional foods really appeal to people in the emerging markets. And the newly affluent people in the emerging markets, the newly affluent consumer. And so, I think Pepsi is really onto something with the yogurt and the humus and the dips and the dairy products that they are moving into right now. I think this will be a great sell for emerging markets. Pepsico is yielding 3.3%. So I own a fair amount of that and that is one I intend to increase in my own portfolio in weeks ahead.

And then finally I’ll give you Government Properties Income Trust because I’ve had some questions about that. This is a real estate trust that rents office buildings to the federal government, to state agencies and to the United Nations, and 94% of their rents come from government agencies. These properties are 96.5% occupied. So this is a wonderful business to be in. You are renting to the most credit worthy tenants in existence. Your buildings are almost full and historically government agencies have a very high lease renewal rate. So you don’t have 10 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM quite the same issues that you do with turnover, lease turnover that you have typically with office buildings. It’s 7.4%. It’s not widely covered on Wall Street, the stock is not, and I think that’s the reason why the stock gets knocked down. It’s a relatively small cap company a little over a billion dollars in market value. And so these smaller companies when a big selling wave hits Wall Street they sell everything. The program traders sell everything.

I think they have been taking this one down even though it shouldn’t be down. This is a company that is paying 7.4% and it is about as safe as you can get in today’s world. So I still like

GOB at $24 or less. If you want to take the lazy man’s route or the lazy person’s route I guess we should say nowadays, this is my recommendation to my dear sweet wife if I die. I’m serious about this. If I were not here to manage our portfolio, I would like her to put as much as she could into this S&P 500 Low-Volatility Portfolio. You buy this one fund, this one exchange traded fund, and you will always own the 100 most stable stocks in the Standard and Poor’s 500 Index. Every quarter the fund rebalances its portfolio. So you are always in the most stable stocks in the

Index. The thing that kind of gives me the heebie jeebies about my own portfolio is if I were to check out of this life tonight my wife and whoever advised her would have to go through it and decide do I keep this stock? Do I throw this stock away? How long do we keep this one and so on and so forth?

You have to make a lot of individual decisions. I think this would kind of overwhelm her to be honest with you. That’s why I think this is ideal for a person who has a spouse or a significant other who is keen on other things besides financial matters and investment. Let’s face it, many of us are in that situation where we have somebody who is very dear to us, but they don’t really care about that. They’re much better at other things. This is the perfect investment to leave to that purpose because you’ll always be in the safest stocks, and it has a very low expense ratio.

It’s yielding about 3.3% right now. I would buy SPLV any time the S&P Index is under 1230. So you may still have a chance to do a little bit of buying in SPLV even in the next few days. All right, we’ve got around the finish line here because I now you have lots and lots of questions. I

Transcription Date: 10/19/11 – Transcriber: LDM have to get to your questions promptly. So let’s just take a couple more slides and then we’ll go right to the questions.

What about gold? A lot of folks are asking about that. Yes, gold prices seem high by historical standards, $1,500, $1,600 and $1,700 an ounce for gold. Just a few years ago I was buying it when it was $350, $400. This seems very high historical standards, but I think it will remain high because we are in a troubled world financial situation and we are likely to be in a troubled situation for some time to come. It is probably another two or three years before we get some clear breakthrough. And governments either clean up their act or they become so irresponsible that the worst fears of the gold bugs come true and the dollar becomes worthless.

In any event, I think you need to have some exposure to precious metals, and mining shares right now are very cheap versus the metal. They’re trading at about 40% discount. If you look at the mining shares as a group, you’re trading at about a 40% discount to their historic average going back to 1983 versus the metal.

So they are very cheap versus the metal and Barrick Gold would be I think one of the safest picks in there. Barrick is trading at less than 10 times estimated earnings for 2011. This is unheard of. The Dow Jones is at 12 times, and here’s a gold mining company at 10 times. This is crazy. I’ve never seen a discount like that for a gold stock. So this is also a company that is growing. Barrick is going to be mining 7.6, 7.7 million ounces of gold this year. By 2015, management thinks they can get it up to 9 million ounces of gold per year. This is the largest gold producer in the world, a very conservative balance sheet and well managed. So this is a Richard

Band gold stock. Yes, there are plenty of other mid gold stocks you could get into more volatile than this, but this is the kind that I think people with my conservative disposition can sleep with and enjoy. Now if you do want to play and you want to roll for the higher stakes, try the April 2012

Barrick calls.

These are call options with an exercise price at $52.50. I’m sorry an exercise at $52.50.

I would pay $2.80 or less, $2.80 or less for these calls, April $52.50 calls at $2.80 or less. If

Barrick stock goes up 25%, these calls will double. If Barrick’s stock goes up 25% by April 2012, 12 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM these calls will double. So that’s how you can double your money with a conservative slow moving gold stock. Even though I’ve given you some stocks to buy, I want to tell you, I want to underline this that we will be selling more than we buy over the next couple of months. That may seem a little bit confusing, but the whole idea is to reorient your stock portfolio so it’s more conservative lower risk than it is right now. So that’s what you want to do to take advantage of this rally we’re in right now. You’re going to be selling more than you buy, moving more money into fixed income than you’re putting into the stock market.

Aim to be five to ten percent below your normal stock weighting by the 31st of January.

Our normal is about 60% stocks, 40% fixed income. We will probably be somewhere between and 50% and 55% in stocks and the rest in fixed income by the end of January. Sell some of your winners and your losers. That’s a good discipline to move out of some of your loses, too. Not just your winners, your losers, too. And how do you make that decision? You look at the volatility. If it’s a very risky stock, if it’s one that goes way down when the market goes down and way up when the market goes way up, it’s not the kind of thing you’re going to want to own if the market takes another slide in 2012. So get rid of your high volatility stocks. If your stocks have a low projected year ahead return, you can look at that on Yahoo Finance and look at what the analysts are projecting for year ahead return on your stocks.

If it’s like on 5% or 10%, or God forbid if it’s a negative projected year ahead return it’s time to move out. Then, of course, look at the tax benefit of taking some losses. There are some benefits taking losses especially here during the last few months of the year. While you may have accumulated some gains from various trading activities during 2011, if you’ve got some gains and you would end up with a tax bill at the end of the year, this is a good time perhaps to take some losses so that you reduce any bill that you may owe to Uncle Sam. Then finally, and this is my last slide before we go into 20 minutes of questions. The hedging tools that we’ll be looking at are these two double bear funds. The Ultra Short S&P 500 and the Ultra Short Financials Fund.

Both of them very liquid.

They are designed so that day to day if the S&P goes up 1%, this fund will go down 2%.

By the same token, if the S&P is down 1%, this fund will go up 2%; two for one leverage in the opposite direction from the market. And so, we will probably be using the SDS, the Ultra Short

S&P 500 Fund to hedge our position in the overall market. For those of you who may own a lot of bank stocks or insurance stocks, those tend to be volatile, and you may want to consider hedging some of your position there. Even if you don’t necessarily sell your whole position, you may want to consider hedging from time to time in the SKF, which gives you that double leverage in the financials. So if the financials go down 1% as a group in a day, then the SKF will go up 2%.

That’s a good way to protect some of your bank stocks, your insurance stocks without necessarily having to sell them. And that brings us to 6:40 p.m. Eastern Time and I have pretty much done what I was supposed to do, doing this presentation in 40 minutes.

And now I want to go right to your questions. So we’re going to leave the screen right here as it is and I’m going to let you ask whatever questions you want, and you’ve already sent a whole bunch of them to me. So I’m going to take a look here in my laptop at some of the questions you’ve sent me, and I’m going to take them in the order they came. So that if you really jumped on this opportunity early on maybe you’ll get your advice right here up front. The first question I want to take is from somebody who asked, “What about your advice for someone who is soon to retire?” And the answer there I think I have already given it to you in pieces here during this presentation, but if you are soon to retire the thing you want to do most is to get as a high a yield as you can on your overall portfolio, your stocks and your bonds. You do not want to be in a position where you have to sell stocks or mutual funds into a declining market. You do not want to do that. So please, raise the overall yield on your portfolio. Sell some of these things with the low yield and move into the higher things I’ve been talking about in this session and also in our November issue.

Now, another question. “Would you ever recommend switching Vanguard Wellesley and

Wellington Funds during this fourth quarter rally to the money market fund to lock in some profits?” No, no, no. Never do that. Wellesley and Wellington are two all weather funds I’ve 14 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM been recommending for the last … Well, we started in 1990. So it’s been 21 years I’ve been recommending these funds. I have never told you to sell them, and I probably will never tell you to sell them and certainly not as a market timing gambit. These are funds that in the case of

Wellesley it is typically 60% in bonds and 40% in stocks. Wellington is typically 60% in stocks and 40% in bonds, but you do not want to sell them. These are all weather funds conservative.

They are low risk, low volatility. You want to keep those from now until doomsday. Do not sell those bonds.

Let’s go on to another question. “With the possible global downturn, where do you see silver going?” We talked about gold and how it will probably maintain its value reasonably well even if we go into a bear market for stocks because there is so much uncertainty in the financial world right now. Silver is not quite such a good hedge because it is more of an industrial metal than an investment vehicle. It always has been actually ever since the dawn of time. Silver has been used more for industrial uses than for monetary uses even though it does have monetary characteristics. So what I’m saying here is that silver has more down side to it than gold does.

So what I would be doing here in this fourth quarter of 2012 is I would expect a rally in silver because silver tends to follow the stock market. And as the stock markets reach a crest sometime perhaps in December, I would switch some of my silver into gold because I think gold is a safer place for your money in 2012.

Now here is a tricky one, and I almost never answer questions like this but hey you’re a subscriber and you pay your way and I have to answer your questions. “Will the S&P hit $1,300 or $1,000 first?” Well, normally I don’t like to answer questions like this. That’s the kind of question Lou Rukeyser would love to throw at people, and then he would always laugh at you on the next time you were on the show if you go the answer wrong. I think what the questioner is trying to get at is, is there more up side or down side risk here in the market? I would have to say there is more down side risk and especially as we get to the end of the year. The rally should keep going her for another 8 or 10 weeks, maybe even a little longer. It could even spill into 2012.

I hope it does really. I’m not rooting for a decline. We may get to $1,300. I think there is a 50/50 15 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM chance that we could go as high as $1,300 on the S&P, and that would allow the year to finish in the black and we would all feel a lot better than we have in recent weeks. But could we get back to $1,000 next year? Yeah, I think there is a good chance we could go back to $1,000 next year.

So which one comes first? I’m not sure we get to $1,300. There’s a chance of it, but I am pretty sure that some time either in 2012 or 2013, you’re going to see $1,000 on the S&P again. And that is when you’ll be glad that you had some money on the side to take advantage of bargains.

“ Why are you recommending selling Hewlett-Packard when it’s down 42%?” That’s a good one. See now I do take fast balls. I don’t just take cream puff pitches. There we go. Why sell HPQ when it’s down 42%? Well, it’s down 42% from its high. It’s actually up from where we purchased it in 2005. So from the standpoint of a subscriber who got in early it’s still a profitable investment for us. But you bring out a very good point and that is a stock that looks like a good investment or at least an acceptable one. To someone who bought at a certain point in the market, it may look like a very discouraging investment to someone who bought later on in the market cycle. And I have to admit myself that I bought Hewlett-Packard a couple of times in the last few years, and I made some money at it, but I’ve lost money on this last purchase much the way you did.

So the question we have to answer ourselves, those of us who are under water on our latest purchase of Hewlett-Packard is this. What’s the upside and what’s the downside and when does it happen? What’s the upside? What’s the downside and how long does it take for all of this to happen? Now, I think if you were to sit on Hewlett-Packard for four or five years or more, I think the company has the potential to turnaround and eventually restore all of the value that’s been lost. Finally, they got rid of that crazy guy from Germany who was destroying billions of dollars of value it seems almost every week with his decisions. They have finally gotten rid of him. They sacked him, and Meg [PH] Whitman is going to try to clean up the mess that he left behind. But he left a tremendous mess. Unfortunately, he left the mess at a time when the business cycle, as we talked earlier in this session, the business cycle is beginning to weaken.

And, you know, as great as technology stocks look right at the moment, history shows that once you get into a recession they take it on the chin. So yes, this is my answer.

If you can hold for the next four or five years, you can ignore the advice that I’ve given in the latest issue to sell Hewlett-Packard. On the other hand, if you are a person who doesn’t want to wait that long and who is concerned that the stock might go lower before it goes higher, that’s my concern, you see. Then you would best advised not necessarily to out and sell tomorrow. I mean we are officially out of the stock as of today, but you may want to make your decision some time before the end of this year. Try to find the best place to exit and maybe come back into this stock again some time in 2012. I’ve done that before. I’ve done that before on stocks even on stocks where I’ve taken a loss, and maybe a year later I’ve been able to go back at a lower price and been able to recoup a good part of my loss on the second purchase at a lower price. So let’s leave it at that. The answer basically is how long do you plan to hold on, and are you prepared to see the stock decline possibly in the interim?

“What are the safest bond funds, municipals or corporate?” The answer to that really has to do with your tax status. If you are in the 35% tax bracket then you probably should be looking at tax free municipal bonds. Some of them are on a tax adjusted basis and at least as good a deal as the corporate bonds. But for something like a retirement account, an IRA, I would say of course you want to go into corporate bonds. You certainly don’t want to own municipals inside a retirement account. But if you’re in the upper bracket, it’s okay to substitute munis for the corporate bonds that I’ve suggested. This will be the tax free munis, not the Build America

Bonds. We’re out of those now because I just feel that they are too closely tied to the Treasury market, and one of these days the Treasury market is going to hurt the Build Americas. “Will you be back down in Florida? We missed you at the Orlando Money Show.” Yes, God willing I will be at the Orlando Money Show. They’ve signed me up and I came with bronchitis on the way down there, and I had to return home for which I apologize back in February of this year. But I do look forward to seeing all you folks again at the Money Show in Orland in February.

“ What is your opinion of the Southern Company? I think it’s a sound investment, the subscriber says.” You know what, I agree with you. Southern Company is a large utility. Let me just take a sip of water here. Southern Company is a large utility based in Atlanta. It’s well run and the market knows that. It’s very seldom that you can buy Southern Company at a bargain price. So if you bought Southern Company years ago at a good price and you’ve watched the dividends rise, you just should pat yourself on the back and keep it forever. I don’t think it’s a stock I would be buying right at the moment because it’s not quite cheap for me. And that’s true by the way of a lot of electric utilities right now. They’ve have a big run up. It’s not such a great time to be loading up on electric utilities even though it’s one of my favorite industries from a long- term standpoint. But Southern Company hang onto it. If you were bright enough to buy it or lucky enough to buy it some years ago, and you’ve got a good yield on the stock as a result, hang onto.

It’s one of the best electric utilities in America.

“ When are we going to be by some of those short exchange traded funds that I was talking about?” Probably not until the market is acting a lot more tired than it is right now. Right now we’ve had a pretty good, I mean not a perfect bottom here in October, but that big turnaround we had two weeks ago today was pretty impressive. I took Enid out to the eye doctor

Tuesday afternoon for her appointment and the market when we left was down about 200 points,

Dow. And when we came home it was up 200 points. So that’s a pretty dramatic turnaround. One of the most dramatic turnarounds we’ve had within a single day in the past 25 years. So that’s a sign I think that the market wants to go higher. As long as that is the case, as long as the technical indicators are pretty strong you don’t want to be fiddling around with a lot of hedges a lot of shorting. It’s a losing game to do that. But as we get into late November, early December and this advance starts to grow some gray hairs then we’re going to look into doing some hedging. So stay with me. I think within another eight, ten weeks we’re going to be … Maybe less than that.

Maybe in six to eight weeks we’ll be doing some hedging.

Here’s a question. “What will the status of the dollar and the Euro be in 2012?” Now there’s a contest between two mangy dogs, isn’t it? The dollar versus the Euro. Now the Federal 18 2011-10-18 17.59 Profits and Pitfalls in 2012

Reserve is trying to destroy the dollar and the European Central Bank is trying to destroy the

Euro. It’s a race to the bottom, but between the two of them, which will be a little stronger in

2012? My guess is that it will be the Euro assuming these potentates over there in the EU follow through with their promise to bail out every institution in sight and every deadbeat government.

Assuming they follow through on these shock and awe plans, I would think some confidence will return, investor confidence in the European financial markets.

And that would probably mean a rise in the Euro, and there is something interesting.

Probably a rise in gold price. Because whenever money flows out of the U.S. dollar it tends to flow also into gold, not only into the Euro but also into gold. So that would be another reason to expect kind of counter intuitively that maybe if the Euro picks up a little bit of ground versus the dollar in 2012 even gold could pick up some buying as well. Because then people will be thinking the Europeans are inflating, too, just like the United States, and this will mean depreciating currency over the purchasing power of currency over the long run. So a rise in Euro could be good for gold, and I think the Euro probably will be somewhat higher against the dollar than it is today on average in 2012.

“Which Swiss bank were you recommending in that email blast?” Somebody is asking me. You probably got that teaser a few days ago about the Swiss stock that I was recommending.

They were a big supplier of Walmart. I’ve got to tell you this, by the way. Whenever I send something out like that as a marketing piece, I never send a tip out to new subscribers like that, that I haven’t already told you about in the newsletter. So the company I’m talking about is

Nestle. Nestle is a huge, huge supplier to Walmart and the most successful food company in the world bar none. So you want to try to buy Nestle at our recommended price or lower, and that will be about the safest company you could possibly own. Based in Switzerland, Nestle. Okay, we’re coming down to 7:00 o’clock. I see I have about 3-1/2 minutes left and so I’m going to have to just take maybe one or possibly two more. Let’s take this one.

“ What mutual fund would you recommend for children ages 13, 17 or 20 with approximately $3,000 each to invest?” Hands down it would be F-M-I, a large cap F-M-I. HX is 19 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM the ticker symbol. We’ve mentioned it again in the November issue. So take a look at the

November issue for more background on that. But what a fund has been. Superbly managed and always seems to go down less than the market when there are difficult times, and then outperforms on the up side. So it has been a great performer in the last five years, really the last ten years and is not well known. That is the key. The kiss of death is when a fund gets so well known that people plow into it, and the money manager has so many assets to deal with that he or she starts investing in second grade ideas, not the best ideas, not my ten best ideas, but my

51st and 75th and 113th best idea. And that’s when your performance goes to pieces as it did with

Fidelity, Magellan and unfortunately with Dodge and Fox Stock Fund and some others as well.

They get too big. So F-M-I, large cap, would be my favorite there.

And then last of all, “What about my projection for Treasury interest rates?” I think we are looking at a generational low in Treasury interest rates that could last. These lows could persist into 2012. I would not be surprised if Treasury Bond yield stayed low for the next year or so. But before you know it, you’re going to wake up one day and the economy will have started to improve and Treasury Bonds will go down the drain. So you’re playing with fire if you hang onto these things. I personally am out of Treasuries and I do not like these low yields. I think they will eventually come back to bite, but maybe not until this bear market that we talked about on Wall

Street is over with possibly in 2012 or 2013. So we’re down to the end of the show, one minute left and I would just briefly sum up by saying one thing and that is at this time you want to get as much of your return up front as you possibly can because capital gains are going to be tough to come by in 2012.

We have little window of opportunity here for the next two or three months to make some trading profits, to sell some of our stocks and mutual funds that may not be performing well and maybe too volatile. But you want to be moving into higher yielding stocks, higher yielding bonds because that will be your protection with the bear comes whether he strikes early in 2012 or later on or even if my timing is a little off and it’s further out. At some point, that bear will still and you will be glad that you have some high yielding protection on your behalf. It’s been great speaking 20 2011-10-18 17.59 Profits and Pitfalls in 2012

Transcription Date: 10/19/11 – Transcriber: LDM with everyone. If you missed out on part of the presentation, remember we will have it posted to the web within a few days. I will look forward to speaking with you again real soon. Thanks again for being with us.

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