Thu, Sep 29, 2011|Dan Ferris

PIMCO: 'Risk off'...

PIMCO: 'Risk off'... Amazon's new Fire... Microsoft: Growth by lawsuit... Bernanke justifies his existence on Earth... Coke CEO: China vs. U.S...

What should you do with your money as Europe falls apart?

According to the world's biggest bond fund manager, the first thing you should do is reduce risk. PIMCO, which also manages the biggest mutual fund in the world (the PIMCO Total Return fund), is decidedly in "risk-off" mode. In its latest quarterly outlook letter, the company says it's reducing exposure to risky European financial institutions, emerging markets, and volatile currencies.

And what does PIMCO consider safe investments these days? In the letter, PIMCO says it likes "strong emerging-market credits, both corporates and sovereigns, as well as U.S. municipals and U.S. agency and non-agency mortgages." (Remember all the talk of huge defaults in U.S. municipal bonds? What ever happened to that?)

As a manager of more than $1 trillion in assets, PIMCO can't sit in cash. It must do something with its assets. So it really can't afford to lie to itself about the state of things. Its expectations for the global economy and the U.S. are low. PIMCO expects the U.S. to grow at a real rate of 0% next year, compared with consensus expectations of 1.5%-2%.

That means a lot of people managing money and running financial institutions think the U.S. economy will grow next year in inflation-adjusted terms. But PIMCO says it won't grow at all. I wonder who'll be surprised and who'll be proven right on that one? PIMCO thinks emerging economies like China, Brazil, India, and Mexico will grow at their slowest rate in a decade next year.

Of course, the world doesn't revolve around the expectations of money managers. They're mostly passive players who commit capital and wait to see what happens. The folks to whom capital is committed... well... they're the ones who make the economic world go round. And while PIMCO furrows its brow and girds its loins for a slowing world economy, entrepreneurs like Jeff Bezos remain optimistic and continue to seize opportunities to make their businesses bigger and better…

Yesterday, Bezos' company, Amazon, announced it'll soon offer a new tablet computer, the Kindle Fire, at a price of just $199. The Kindle Fire has a smaller screen and less storage than the iPad. It runs on Google's Android operating system.

It also has new touch-screen versions of its ultra-popular Kindle e-book reading device (the most popular product Amazon sells). You can't buy Kindle Fire yet, but you can pre-order one from Amazon. It's scheduled to come out November 15. Amazon likes November release dates. The first Kindle was released on my birthday. I logged onto Amazon and there it was. I had to buy one...

I've never bought shares of Apple Computer, nor recommended purchasing them in a newsletter. It has always seemed to me like one day, it would face aggressive competition. So far, it's been my mistake to think of Apple as a manufacturing company like Dell rather than the Coke-like uber-brand it seems to be. Apple keeps launching new products, all stamped with that unique Apple spark of creativity.

Still... Kindles are insanely popular. And $199 is a lot less than you'll spend for an Apple iPad (which start at $499). Will Amazon make a dent in iPad demand? Will tablet demand grow so much it won't matter?

Amazon has one huge advantage over all the other would-be Apple competitors. Amazon already has a huge library of digital books, music, and movies, just like Apple's iTunes. And, like iTunes, Amazon already attracted millions of credit-card numbers.

If at first you don't succeed, get a lawyer!

That seems to be Microsoft's strategy in the smartphone business. It has inked a deal with Samsung, in which Samsung will pay Microsoft royalties on every smartphone sold that runs Google's Android operating system. Why is Samsung willing to pay Microsoft royalties on Google's operating system? Samsung believes Microsoft's patent infringement allegations against Google have some teeth.

Ben Bernanke gave a speech yesterday in which he – I hope this doesn't get me fired – made some really good suggestions. They're so good, in fact, I'm supremely confident U.S. politicians will ignore them. Bernanke cited a 1990 report articulating a viewpoint known as the "Washington Consensus," authored by economist John Williamson. The report contains three main recommendations to foster growth in emerging economies.

The first recommendation was to control government spending, have low inflation, and become more politically stable so businesses could thrive. The second recommendation was to allow markets to operate more freely, and the third recommendation was to promote institutions like private property and the rule of law.

Bernanke cited success stories like Brazil, which has seen annual inflation rates fall from around 500% in the late '80s and early '90s to just 5% since 2006.

Bernanke also highlighted the importance of technology and education, citing the example of India, whose success in information technology has been accelerated by a large supply of educated, English-speaking people.

But "Helicopter Ben" really blew me away at the end of his speech by addressing not emerging market economies, but the U.S…

Indeed, advanced economies like the United States would do well to relearn some of the lessons from the experiences of the emerging-market economies, such as the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability.

Bernanke is... er... how do I say this? Well... He's right. With Komrade Obama, Herr Bush, and most of their predecessors, we've seen the erosion of fiscal discipline, the role of markets, and the rule of law. What we've had instead is a spending binge to end all binges… way too many rules and regulations (You can't even sell lemonade in the U.S. without the government's permission.)… and one assault after another on property rights (Kelo v. City of New London) and the rule of law (like Komrade Obama's usurpation of GM bond holders or the Bush administration's embrace of torture).

I'd like to see at least a few of these intelligent policies implemented… and soon. This month, the government released its latest estimate of poverty in the country…

According to a report from the Census Bureau, 46 million Americans – more than 15% of the population – are now living below the poverty line. That's the highest number since the Census Bureau started tracking poverty in 1959. And the highest poverty rate among developed nations. The Census Bureau defines the poverty line for individuals as an annual income less than $11,139.

You can expect things to get worse. The economy's artificial "goosing" from the Fed is wearing off. There's no job growth.

We know it looks bleak out there for a lot of folks. They often write in to us looking for advice on how to secure their retirement or just improve their household balance sheets. Some criticize us for providing advice that "only the wealthy" can act on.

If you're in this camp… or if you're just interested in a fantastic read on building wealth, make sure to read our friend Mark Ford's latest piece… Which was just published in DailyWealth.

Mark is a legend in our business. Nobody writing a newsletter today provides as much "real world" insight on building wealth through saving, earning, and investing as Mark does. Porter counts him as a mentor. Mark's unconventional wealth advice is generating a huge amount of positive feedback right now. You can read his piece (for free) right here. If you don't act on his insights, it's extremely unlikely you'll ever become financially independent.

End of America Watch

As if to second Ben Bernanke's praise of emerging markets and implied criticism of the U.S. government's interference in the economy, Coke CEO Muhtar Kent said yesterday in many ways China is a better, easier place to do business than the U.S. Kent told the Financial Times individual states here don't compete with each other the way Chinese provinces do.

Coke's China sales have doubled the last five years and now account for 7% of its total sales. Coke will invest $4 billion in China in the next three years.

Speaking at the Clinton Global Initiative conference in New York yesterday, Kent also criticized the tax on the repatriation of foreign earnings of U.S. companies. "If you talk about an American company doing business in the world today with its Chinese, Russian, European or Japanese counterparts, of course we're disadvantaged," Kent said. "A Chinese or Swiss company can do whatever it wants with those. When we want to bring them back, we are faced with a very large tax burden."

To see the End of America video that started it all, click here...

Also, to read an exclusive interview with Porter Stansberry explaining how to protect yourself from the End of America, click here...

To sign up to receive the latest information about our Project to Restore America, click here.

New 52-week highs (as of 9/29/11): None.

In today's mailbag... two subscribers write in with questions about trading strategies. If you have questions for us, write us at feedback@stansberryresearch.com.

"I understand the benefit/return of reinvesting dividends through DRIP programs for the World Dominators. Could one do as well by selling covered calls (a couple of strike prices above the current price) on World Dominators each month as a way to boost the returns?" – Paid-up subscriber Jeff Keller

Ferris comment: I view the DRIP route as much, much better than the covered call route. With covered calls, you either time it perfectly every time, or you're constantly liquidating your portfolio, which is no way to compound for the long term.

"Last week you remarked that the increased dividend must be a sign that things are going well. Today you are recommending 'sell.' I have trouble reconciling this advise. If one's purchase price was such that the appropriate trailing stop was not triggered why the unqualified sell advise?" – Paid-up subscriber Altman

Ferris comment: The position you mention is CreXus Investment Corp. If your trailing stop wasn't hit, don't sell. We hit ours in the 12% Letter model portfolio, so we're out. It's really that simple. Hitting a trailing stop says nothing about the quality of the business. It just says a certain share price was reached. It is a purely mechanical device. It does not reflect the quality of the business.

No strategy is universally good. Every strategy has its strengths and weaknesses. The strength of the trailing stop is you'll never lose more than your stop amount on any position. The weakness is you'll occasionally sell a good business that might have made you a fortune. Everything in life is a tradeoff. There is no universal perfect way to manage your money.

Regards,

Dan Ferris

Medford, Oregon

September 29, 2011