Grow Your Portfolio the Intelligent Way

January 2008 Issue

By Richard C. Young

The Return of Imus…

Don Imus has signed a new five-year contract with Citadel Radio, which is a good thing, as Imus announced on his radio return, because it will take that long to get even. With sharply reduced economic momentum already in place, lots of businesses, not the least of which is RFD-TV, will get a huge Imus-related economic boost.

In coming months, $600 billion of sub-prime adjustable-rate mortgages must be reset–at higher interest rates. Perhaps as many as two million homeowners are in line for the day of reckoning. Look out below! Mortgage default rates are already soaring in front of the biggest U.S. pullback in consumer spending in decades. The days of easy credit are O-V-E-R. Home prices have recently produced their sharpest decline in two decades. Furthermore, the U.S. dollar is in the tank and heading lower, perhaps a lot lower, as the Gulf states threaten to rethink their currency peg against the dollar.

In a featured Wall Street Journal editorial, a renowned scholarly institute told readers that surprisingly weak August employment may reduce September consumption enough to push third-quarter growth below 2%. Well, the preliminary third-quarter GDP number was instead a resounding 3.9%, and the revised GDP report now shows even hotter 4.9% growth.

The Nutcracker?

If you are like many investors, the above scenario is a real head-scratcher. Do we have boom times in the U.S. or the start of a nutcracker of a new recession? Well, more so than at any other time in your investing experience, the key here is who is "we." For some of you, the next year is going to feel like a depression. For others, opportunities will be abundant, and you will enjoy success beyond your dreams. Let me walk you through what is certainly a most complex economic, monetary, and investment scenario. Back in the 1970s, I was editor of Young’s World Money Forecast (YWMF). I focused on currencies, gold, and the Leading Economic Indicators. In fact, I forecasted the Conference Boards leaders each month with, thankfully, pretty good accuracy. I have always found that the leaders, when observed in concert with the Coincident Economic Indicators, have given me a good feel for economic momentum across our economy. All of the factors that I analyze monthly are now in negative ground. Some of the most reliable indicators already signal a recession. The others point to trouble by spring. Although we indeed had a gangbusters third quarter, the fourth quarter and the first couple of quarters in 2008 will show greatly reduced growth. You can take some comfort, however, in knowing that today’s U.S. economy is a vastly dissimilar beast to the economy of the 1970s.

My chart on U.S. Industrial Production provides a look at year-to-year rate of change back to the 1920s. I’ve labeled three zones for you. Notice the sharply reduced volatility through the zones. In recessions of yore, inventory management was archaic, and volatility was fierce. The Digital Revolution has changed everything. Cycles are now muted and largely manageable.

U.S. Export Express

Looking ahead, keep in mind that housing alone is unlikely to produce a recession. Home construction accounts for less than 5% of U.S. GDP. Also focus on red-hot export growth, due, in part, to the weak U.S. dollar (see my currency charts in the Economic Analysis supplement). Exports grew at a seasonably adjusted 19% in the third quarter versus 7.5% in the second quarter and a puny 1% in the first quarter of 2007. The U.S. export express is right on track.

To show you the shocking difference in today’s digital-age economy versus the economy of old, check out the following: This past spring, two kids started a music-referral program (on the social network Facebook) called iLike. Fortune reports that 10,000 people signed up within just three hours, and 10 million signed up within six months. Just like the old days, huh?

Profound Promise

Today, nearly 30% of U.S. corporate profits come from abroad, versus only 20% when the new century began. And the foreign contribution will continue to expand. The primary beneficiaries will be big blue chips like my advised Boeing (NYSE: BA) and Coca-Cola (NYSE: KO). Excellent research from T. Rowe Price shows that over the last three years global growth has averaged more than 5% annually, and emerging market growth has exceeded 7%, closely imitating the industrial revolution that began to sweep through the developed world some 200 years ago. Despite what will be a potentially scary economic scenario in the U.S. over the next few quarters, the whole global economic scenario, when overlaid onto the Web’s Digital Revolution technology, offers profound promise for the astute investor.

Blue Chips or Start-Ups?

Credit-market jitters are back. Investors are scared and panicked. Fear and emotionalism are prevalent. The stocks of some of the largest banking institutions in the world are being treated like start-ups.

But the volatility in financial stocks signals the end of the credit cycle. When the credit cycle ends, banks start to clean up their balance sheets. Bad loans made during good times are written off, and the focus shifts to rebuilding capital. The actors in every credit cycle change, but the story is always the same. In the last cycle, the write-downs were on technology and telecom loans; in the previous cycle, it was emerging market debt; prior to that, commercial real estate; and in the early 1980s, energy firms were the culprits.

In the current credit cycle, structured finance is the linchpin—think collateralized debt obligations (CDOs), asset-backed securities (ABSs), and structured investment vehicles (SIVs). The Ph.D.s on Wall Street were once again wooed by the elegance and cleverness of their own inventions—and, of course, by the piles of cash these vehicles generated for their employers. As is often the case with this crowd, common sense and business savvy were lacking—"simple is sophisticated" is absent in the Ph.D. finance curriculum.

Wall Street Alchemy

The key to structured finance is "securitization," a fancy word for the pooling and resale of loans. Banks originate loans and then sell those loans to companies that securitize them. Securitization turns thousands of individual loans into bonds that can be purchased and sold by investors. The major drawback of securitization is that the loan originator has no skin in the game. Loan losses are the problem of investors in securitized loans, not of the loan originators. Investors in securitized loans, of which mortgage-backed securities are the most common, avoided any serious conflicts of interest for years by favoring high-quality mortgage-backed securities. The demand for low-quality mortgage-backed securities was very low. In simple terms, the market kept the originators in line, but Wall Street recently fixed that.

Enter the CDO. A CDO buys a portfolio of mortgage-backed securities; slices and dices the interest, principal, and default exposure up into different buckets; and sells interests in those buckets to investors in the form of securities. With a dose of financial wizardry, CDOs convert a pile of junk mortgages that few investors will touch into highly demanded AAA-rated securities.

Models Run Amok

How clever. The problem is that CDOs replace credit analysis with default forecasting. Employment, credit history, and income verification became unimportant variables in the decision to loan money. The Ph.D.s just threw these variables into their model and structured the CDO accordingly. The originators loved this. They could make loans with exorbitant up-front fees to borrowers destined to default. The originators quickly shuffled these loans off their books to be securitized and packed into CDOs. But when the originators started indiscriminately handing out money, the behavior of borrowers changed—condo flipping comes to mind. The CDO modelers never thought to account for the adaptive nature of markets. Ph.D.s struggle with such a concept. The Nobel Prize winners at Long-Term Capital Management made the same mistake. Both groups overlooked the impact of their own participation in the market. When actual defaults started to come in higher than the models estimated, the demand for CDOs evaporated, and the cycle turned.

When the market for CDOs dried up, many banks ended up with CDO assets that they did not anticipate owning. The sudden appearance of CDOs on banks’ balance sheets required banks to make provisions for potential losses. CDOs are considered securities and must be written down to fair market value. But with no buyers and only distressed sellers, the market price is unreliable. Obviously bank write-downs may prove to be too low or too high, depending on the future performance of the mortgages underlying the CDOs. Presently, many loans in CDOs continue to pay interest and principal. The issue is that write-downs decrease equity capital on banks’ balance sheets. Banks’ capital ratios are monitored by regulators and, if capital dips below a certain percentage of assets, regulators start asking questions.

Citigroup and Bank of America OK

Monster Master List holdings Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have both announced big write-downs recently. Citigroup even decided to raise additional capital. If the general credit situation worsens, Citigroup and Bank of America could be forced to take more write-downs, but these companies are two of the largest financial institutions in the world. Both trace their roots back to the early 1800s. Citi and BAC survived the Great Depression, 31 documented recessions, and countless credit cycles. These are not feeble franchises. A feeble company could not raise $7.5 billion in a few weeks as Citigroup recently did.

In the short term, Bank of America and Citigroup may continue to suffer along with the rest of the financial sector. But as the credit cycle unfolds, the weak hands will fold, and banks like Citigroup and Bank of America will improve their competitive position.

Cheap Stocks

The volatility and distress in the financial sector is creating opportunities that I have not seen in years, if ever. Citi, the largest financial institution in the world, is yielding close to 7%, Bank of America is yielding close to 6%, and my highly-favored and highly-rated preferreds are trading like junk bonds. The cheapest place in the stock market right now is in the sectors that are being punished. Armies of vulture investors are standing on the sidelines with billions in hand, eager for the credit situation to worsen. These savvy investors know panics create opportunities. Now is the time to be excited. I will follow developments in the credit markets closely over the coming months. Anecdotal evidence will be my guide to a credit-cycle bottom. Be sure you have deployable liquid funds available in 2008.

#1 Distressed Securities

If you are an aggressive investor eager to get started in distressed investing, Young Research’s Distressed Securities and Takeover Candidates is for you. Our watch-list is exploding; the opportunities are growing by the day and sometimes by the hour.

Preferreds a Steal

Fear and panic have not been limited to the equities of financial companies. Preferred securities, dominated by financial issuers, have sold off as well. When you invest in preferreds, you invest for income. Price fluctuations in the value of your preferred securities are best ignored. And do not forget that preferreds are senior to common stock. The dividend on the common stock of an issuer must be eliminated before the dividend or interest on a preferred can be eliminated. In the event of default, preferred holders get paid before common holders receive a dime. Let’s look at the risk in Citigroup. After accounting for the $7.5 billion in equity capital raised and the $11 billion expected to be written down in the fourth quarter, the company will have roughly $124 billion in capital. Citigroup’s total sub-prime exposure, as disclosed in the latest 10-Q filing, is $55 billion—less than half of the common equity. Preferred holders are sitting pretty.

Buy These

The selling in preferreds is overdone. High-quality issues rated single A, and in some cases AA, offer compelling yields. I like the new issue from Barclays; it is rated Aa3/A+, expected to yield 7.75% to 7.875%, and eligible for the 15% dividend tax rate. This issue does not have a symbol yet. I also like the new issue from Bank of America, symbol BACprJ, which is rated Aa3/A+ and expected to yield 7.25% to 7.375%. You can also add to your preferred positions in Citigroup (symbol: CPRF).

Big News from Russia

Russian aluminum producer UC Rusal, majority-owned by Oleg Deripaska, has agreed to buy a 25% stake in Norilsk Nickel (OTC: NILSY) from Mikhail Prokhorov. This would seem like a plain vanilla sale except that Prokhorov has already promised his stake in Norilsk to his partner Vladimir Potanin, whom he has been feuding with after the two had a falling-out. There may be pressure on Potanin to give up his right to buy a stake in Norilsk since Deripaska is a close friend of the Kremlin. A tie-up between Rusal, which produces 15% of the world’s alumina, and Norilsk, which produces 20% of the world’s nickel and half of its palladium, would be welcomed by the government of Russia. The Kremlin wants to keep strategic assets in Russian hands. Continue to add to your Norilsk shares; there may be a buyout here. The chart below shows Norilsk’s continued power relative to the S&P 500.

Stay with Rio Tinto

On November 8 Rio Tinto (NYSE: RTP) rejected a bid from BHP Billiton (NYSE: BHP). The rejection did not kill the idea of merging the companies, but Rio maintained that the offer was too low. As Rio mounts a defense against BHP, it will be looking to return value to shareholders in a variety of ways. Rio vowed to raise dividends, pay down debt, find more savings in its recent Alcan deal, and increase production. While these goals may not be immediately achievable, Rio is putting pressure on BHP to up its bid. A combination of the two companies would create synergies in operations and in the use of port and rail facilities. The combined company would be the world’s largest iron ore producer, aluminum producer, and coal shipper; a producer of 6% of the world’s copper; the third-largest diamond producer; and a leading producer of many other materials. The anti-monopoly hounds are already barking at this merger and, if it does happen, some assets will probably have to be sold—most likely in iron ore. Either way, Rio’s shares will likely increase in value as a result of this offer. My chart on Rio Tinto shows the company’s share price skyrocketing as its full value is determined. And the chart below shows BHP outperforming the S&P 500. Continue to hold shares of Rio Tinto and BHP.

Q&A Issue

February is my annual reader Question & Answer issue. You’ll get your only chance of the year to have your voice heard in my monthly letter. E-mail, fax, or mail me your best question. The broader its appeal, the more likely it is to see the light of day. Please, no questions about your specific financial circumstances.

Monster Master List Update

I am adding Schlumberger (NYSE: SLB) and StatoilHydro (NYSE: STO) to my Monster Master List. To make room, I am dropping Anheuser-Busch (NYSE: BUD), Credit Suisse (NYSE: CS), and Whole Foods (NASDAQ: WFMI). All three are fine companies, but to add names, I must drop a few names from the list. Also on my Monster Master List, Aber Diamond (NASDAQ: ABER) changed its name to Harry Winston Diamond Corp. (NYSE: HWD). On my Mutual Fund List, I am adding iShares Brazil (EWZ) and dropping Dodge & Cox Stock (DODGX), which has simply gotten too big.

Real Big Deals

So far in the fourth quarter, stocks are down big. And over this period, intermediate Treasuries have soared as rates have fallen under 4% from 5.25% in mid summer. As Chart #51 in my economic analysis shows, in 12 of the 13 years that the S&P 500 has been down since 1950, intermediate Treasuries advanced. In the only exception year, intermediate Treasuries were down a scant 0.74%. In Chart #53, you see how a balanced mix of stocks and bond mutual funds can provide you with armadillo-like defense. As my chart shows, the last meaningful down year was 1974, and the two following years kicked back with strato-gains—all of which reinforce my steady theme of balance and cash flow from dividends and interest. If you are retired or soon to be, spend some time with the back page of my enclosed complimentary Economic Analysis investment strategy, and go over each of my concise eight charts. When you have concluded this deliberate review, I can assure you that you will have a better feel for the power and comfort to be found in a measured, properly balanced program of blue-chip investing.

Top 10 Common Stock Countdown

(1) Johnson & Johnson (NYSE: JNJ): In the U.S., 40% of people choose contact lenses instead of glasses for vision correction. In Asia, only about 5% choose contact lenses. Johnson & Johnson has opened eight Vision Care Institute branches worldwide. The company will use the institute to educate eye care professionals in the newest technologies and promote J&J’s Acuvue eye care products. In the U.S., J&J is expanding its vision care business by ramping up marketing to groups with low rates of contact lens usage. My long-term trend chart shows J&J trading at a discount to trend. Buy.

(2) Plum Creek (NYSE: PCL): Plum Creek is the largest landowner in the United States, owning 8.2 million acres. PCL grows trees for harvest and develops land across the country. Each year Plum plants 85 million seedlings to grow into harvestable trees. As Plum’s trees grow, the trees’ value grows and, even if they aren’t harvested, PCL generates value for the future. My relative strength chart on PCL shows higher highs and higher lows against the S&P 500. Buy.

(3) Illinois Tool Works (NYSE: ITW): ITW owns 750 business units in 49 countries. But, to stay focused, ITW uses the "80/20 Rule." This rule focuses the company’s efforts on the 20% of its businesses that generate 80% of its revenues. The company works to streamline operations for the 20% of top revenue-generators. Of the 80% of companies that produce the remaining 20% of revenues, those with potential are nurtured by management, and those without are eliminated. ITW’s 80/20 Rule is also applied to supplier and customer relationships, favoring key suppliers and customers that do the most business with ITW. This process keeps margins high, new ideas in the pipeline, and management focused in the right direction. ITW is outperforming the S&P 500. Buy.

(4) McCormick (NYSE: MKC): McCormick recently purchased the Lawry’s brand from Unilever (NYSE: UL). Lawry’s makes marinades, seasoning mixes, and spice blends. In one purchase, the company eliminated a competitor, gained a great new brand, and expanded its operations in the U.S. and Canada. McCormick’s CEO Robert Lawless said that the Lawry’s brand has been near the top of McCormick’s acquisition list for the past 11 years. The Lawry’s brand expands McCormick’s marinades business substantially and will give MKC a leading position in that market. My long-term trend chart shows that McCormick is undervalued. Buy.

(5) Black Hills (NYSE: BKH): Black Hills is currently wrapping up its purchase of Aquila’s assets in Colorado, Iowa, Kansas, and Nebraska. This purchase will increase Black Hills’ customer base by over five times, double the number of employees, and spread its business over 12 states and into Canada. Black Hills produces gas, oil, coal, and electricity, and owns electricity and gas distribution networks. My relative-strength chart shows a positive trend for Black Hills over the course of 2007. Buy.

(6) Nestlé (OTC: NSRGY): Nestlé recently purchased the Ruzskaya Confectionery Factory. The Ruzskaya company makes the Comilfo and Ruzanna brand chocolates in Moscow. Russia’s chocolate consumption is booming—all that vodka must need a chaser. Chocolate company Barry Callebaut predicts consumption will grow 32% by 2011. My price chart shows Nestlé’s strong upward trend. Buy.

(7) Rayonier (NYSE: RYN): Rayonier is a forest products company with three divisions: timber, real estate, and performance fibers. Rayonier’s real estate arm, TerraPointe LLC, has been granted development rights in Bryan County, Georgia, along 3.5 miles of I-95 to develop 3.1 million sq. ft. of commercial property, 3.75 million sq. ft. of industrial property, and 10,700 homes on 3,339 acres. Rayonier owns 2.5 million acres of timberland and plans to continue to develop more sites in Florida and Georgia. My relative-strength chart shows Rayonier building a base against the S&P 500. Buy.

(8) General Electric (NYSE: GE): GE’s NBC arm has broken outside the traditional Nielsen ratings system and decided to adapt to television viewers’ changing habits. NBC has agreed to purchase information from digital video recorder company TiVo to develop better advertising for viewers that speed through ads and to better understand how viewers watch NBC programming. TiVo provides up-to-the-minute data on what owners of its set-top boxes are watching and can create very accurate demographic viewership information. While NBC only generates 10% of GE’s revenues, this type of market intelligence can be leveraged across the company to maximize marketing efforts in GE’s consumer products business. My long-term trend chart shows GE well below trend. Buy.

(9) PepsiCo (NYSE: PEP): A new segmentation strategy has been introduced at PepsiCo to deepen the bench of possible successors to the capable Indra Nooyi. Nooyi was recently ranked the 23rd most powerful person in business by Fortune. While she probably won’t retire for a while, it is imperative that her successor be well-prepared to shoulder the load of running Pepsi. Pepsi has made smart decisions on Nooyi’s guidance, like spinning off what is now Yum! Brands, Inc., and buying Tropicana and Quaker. Under Nooyi’s tenure, PepsiCo has also made strategic alliances like its North America Coffee Partnership with Starbucks. This partnership recently expanded to China where Frappuccinos will be sold throughout Pepsi’s distribution network. My price chart for PepsiCo shows it powering through market instability. Buy.

(10) Hormel Foods (NYSE: HRL): As grain prices skyrocketed earlier in the year, Hormel missed the boat on raising prices on turkey products sold by its Jennie-O Turkey Store line. Jennie-O generates 20% of Hormel’s sales. During the third quarter, Hormel finally got the prices up on its birds, just in time to prevent the company from being the Thanksgiving turkey. Good timing, as 45 million turkeys are sold in the U.S. for Thanksgiving consumption alone—that’s almost one-sixth of the total for the entire year. My long-term trend chart for Hormel shows the stock trading at a discount to trend. Buy.

What’s Up & What’s Down

The average stock, as measured by the Value Line Index, is down 3% year-to-date, but if you have invested along with me, you are still up double digits in 2007. The weak dollar is boosting the international earnings of large multinational companies—the Dow is loaded with them. Continue to add to your Dow Diamonds Trust (DIA) position. The weak dollar is also adding to your returns in international stocks. Country selection is important when you invest internationally. The MSCI EAFE Index, considered the international version of the S&P 500 for performance comparisons, is only up 13%. You are up more than twice that amount on many of the country funds on my list. Third Avenue International (TAVIX) is lagging year-to-date, but the fund has a big cash position. Third Avenue International’s big cash position is a valuable resource that can be used to take advantage of opportunities in the stocks of distressed companies. REITs are still lagging year-to-date. Sit tight and collect your dividends—the market will come back around to REITs. The fixed-income funds on my list provide comfort to retired investors in times of market volatility. Vanguard GNMA (VFIIX) is now up 6.9% year-to-date.

Thirteen countries are part of the euro currency zone. Among the European countries not part of the euro system are Britain, Switzerland, Norway, Sweden, and Denmark. When looking at portfolio diversification, remember that currency fluctuations play a big part in the total picture. In fact, in many cycles currency will be the dominant component. Worldwide, inflation has kicked back in—and with a vengeance. China and Russia lead the list of problem children, and gold, of course, is the currency of last resort. In my Economic Analysis, chart #25 now indicates that the theoretical monetary price for gold is over $7,000/oz. My above listed streetTRACKS Gold Shares (GLD) is up 24.5% year-to-date versus gains of 17.8% and 22.0% in 2005 and 2006. If you have not had gold in your portfolio, you have gone into battle without a primary defensive warrior. YTD, Young Research’s Retirement Compounders are up 6.9% (unaudited) versus -0.3% for the Value Line (the best benchmark), -3.0% for Olstein Financial, and -7.6% for Bill Miller’s Legg Mason Value Trust. Over the last 10 years, stocks have risen nine in ten times in the fourth quarter.

  
2005
% Change
2006
% Change
2007 YTD
% Change
Dow Jones 30 Ind. 1.7 19 9.1
Dow Jones 15 Ut. 25.1 16.6 19.2
Dow Jones Trans. 11.6 9.8 1.4
S&P 500 Index 4.3 15.1 4.9
NASDAQ Comp.      2.2 10.3 10.9
Value Line 2 11 -3.1
Dodge & Cox Bal. 6.6 13.9 2.7
Vanguard Bal. Index 4.7 11 6
Wellesley Income 3.5 11.3 5.8
Wellington 6.8 15 8.4
Dow Diamonds Trust, Series 1 2.5 18.9 9
Mutual Shares (Z-Shares) 10.4 18.4 4
Vanguard 500 Index  4.8 15.6 5.3
Vanguard Growth Index 5.1 9 12.2
Vanguard Value Index 7.1 22.2 0.1
Vanguard Equity Income 4.4 20.6 4.8
Third Ave. Value 16.5 14.7 7
Third Avenue Small-Cap Value 11.1 11.4 -0.4
Dodge & Cox International 16.8 28 11.9
Fidelity Canada Fund 27.9 15 31.4
iShares Australia 16.7 30.8 33.5
iShares Hong Kong 7.3 29.3 39.9
iShares Singapore 14.3 45.8 26.9
iShares Switzerland 13 30 10
T. Rowe Price Japan 40 -5.7 -0.2
T. Rowe Price Em Eur & Mediterranean 59 34.7 18.7
iShares Sweden 10.3 43.7 2.7
iShares Malaysia -0.6 36.4 37
Third Avenue International 18 17.1 4.9
Fidelity International Real Estate 14.9 42.9 -3.2
T. Rowe Price Real Estate 14.5 36.8 -15.5
Third Ave. Real Estate Value 14.4 30.2 -7.1
Vanguard REIT Index 11.9 35.1 -13.5
American Century Global Gold 28.9 26.8 15.5
iShares Goldman Sachs Natural Resources 36 16.4 24.7
streetTracks Gold Shares 17.8 22 24.5
Fidelity Natural Gas 45.9 5.3 24.1
T. Rowe Price New Era 29.9 17 32.9
Jennison Natural Resources 54.6 21.7 38.3
Vanguard Precious Metals & Mining 43.8 34.3 33.2
Vanguard Inflation-Protected Securities 2.6 0.4 12
Amer. Century 2025 (US Treasury STRIPS)   14.2 -1.6 11.4
Dodge & Cox Income 2 5.3 4.5
Vanguard GNMA 3.3 4.3 6.9
Vanguard High-Yield Corp. 2.8 8.2 1.1

A Revolution

As The Economist correctly alerts its discerning, largely erudite followers, "The world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging giants." I didn’t see any mention of China’s use of cyber attacks or what the U.S. Center for Intelligence & Research refers to as "political and military goals." During the 2008 Beijing Olympics, I expect Falun Gong to really stir the roux. It won’t be pretty. Look for big time clashes outside Olympic venues. And the chaos will be captured live for the entire world to view.

According to Foreign Policy, since 2001, Chinese cell phone use has jumped to 600 million from 140 million, and, since 2000, the number of Chinese Internet users has soared to 162 million from 17 million. Political economist Laurence Brahm writes that "central authority in China no longer holds any sway." According to L.B., "An average of 80,000 serious protests and riots per year have occurred over the last five years." My investment in the Far East is concentrated not in China, but rather in Hong Kong and, to a greater degree, Singapore. Buy the iShares Singapore (EWS). Singapore is largely free of graft-ridden corruption and, as The Economist notes, is squeaky clean and the absolute model of order and prosperity. Singapore, which runs both a current account and a budget surplus, will have GDP growth in excess of 9% this year. Its unemployment rate is only 1.7%. Singapore is relatively pollution free, and has a highly efficient government, and has a super health care system ranked best by the World Health Organization. Over just the past two years, the number of medical travelers to Singapore jumped 28% to 410,000. And Singapore has one of the world’s best education systems. Little wonder Jim Rogers, one of the most astute Asian followers on the scene, recently moved his family to Singapore. For more on Singapore, go to www.youngresearch.com

Aside from iShares Singapore, my own single largest purchase recently was Vanguard GNMA Fund (VFIIX), which I strongly advised for you. GNMAs are full-faith-and-credit pledge U.S. government backed. R.I.P. former Cleveland Browns and Ohio State football great Bill Willis. Make it a good month.

Warm regards,


Richard C. Young

P.S. I look for Citigroup to regroup, as apparently does ESL Investments Eddie Lampert, who reportedly owns 27 million shares, which were purchased between $49 and $54/share (now $33).

P.P.S. It appears that Brazil has discovered an off-shore oil field with reserves equal to all of Norway’s. Moreover, there looks to be potential for many more finds on a similar scale. Buy a little iShares Brazil. Next month, I’ll kick off my 44th year of advising wonderful folk like you with my "Fund of the Year" selection and the refocus of Fidelity Investments as a mutual fund leader.

P.P.P.S. Go to www.youngresearch.com for intelligence on Islamic terror, the 2008 presidential race, and my latest essential music listings.

Breaking News: As we were going to press with this month’s issue, Fording Canadian Coal (NYSE: FDG) announced that its Trustess (board) formed an independent committee to explore strategic alternatives. This is boardroom speak that translates to "we are putting the company up for sale." The most likely buyer of Fording would be Teck Cominco (TORONTO: TEK-SVB.TO). Fording’s primary asset is a 60% interest in the Elk Valley Coal Partnership. The other 40% of the partnership belongs to Teck Cominco. A tie up between Fording and Teck would likely result in significant cost savings. Continue to hold your shares of Fording.

Richard C. Young’s Intelligence Report® (ISSN 0884-3031) is published monthly by InvestorPlace Media, LLC, 9420 Key West Ave., Rockville, MD 20850. Please write or call if you have any questions. Phone: 301/424-3700 or 800/301-8968. E-mail: service@intelligencereport.com.
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