Guest Author: Gary Scott

Gary Scott Highlights the Risks & Rewards of Leveraging

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 1
A recent article posted by Gary Scott about the Real Laws of Investing outlined that investing in environmental issues is a huge and long lasting trend. Gary has been proving this fact.  He developed with the Danish Jyske Bank a Green Portfolio last November 20076 and it has been rising steadily since.  By mid July 2007, eight months and ten days after this portfolio was created it had risen 201.14%.  $100,000 invested Nov. 1, 2006 was worth $301,148. 
 
To make matters better the worst performing of the five portfolios that Scott created with Jyske is up 38% in this same period.  The other three portfolios are up 38%, 45% and 62% in this time period.   Such high returns are possible when one uses intelligent leverage.
 
This makes a compelling investment story considering that an investor can create a portfolio like this at one of the world’s safest banks.
 
Yet Gary recently shared a really important point about the loss potential of leverage as well. He wrote:
 
“Last year our portfolios had great success also.  Our top portfolio (Asian Emerging Markets) rose 114.16% from November 2005 to November 2006.
 
“Yet when we started our five portfolios in November, 2006, we reduced, rather than increased the leverage we used.   This is because the 2006 emerging portfolios gave us great performance for the whole of the year, but they also had a severe dip in between
 
“Look at what this means so you can see both sides (the ups and downs) of leverage.
 
“The 2006 Asian Emerging Portfolio began October 21, 2005 and shot off like race horses bolting from the gate.
 
“Four months after it began, I wrote:
 
“After 20 weeks on March 5, 2006 the Asian Emerging Portfolio has risen +75.19%  
“I also added: “These results are especially pleasing since there have been several articles in newspapers that warn that Borrow Low systems of enhancing profits through leverage may be at an end due to sharp shifts in several currency parities”.
“The warnings were true.  Beginning in March 2006 the second worst emerging market plunge of the decade began.
 
“In July 2006, a portfolio update said: “The last month has seen a blood bath in emerging markets and currencies”. 
 
“The Emerging Asian Portfolio had dropped from being up 75.19% to being up +30.28%, a loss of nearly 44.91% in four months.
 
“If an investor, attracted by high returns, had jumped into that portfolio in March 2006, they were down …badly.  From March to July the portfolio was down 44.91%, but leverage made the los much worse!
 
“If $100,000 were invested in March 2006 and an additional $200,000 borrowed, the two times leverage meant that the investor lost $134,710. Those who jumped in at the early March top could have lost their entire investment, plus 34.71% more.  This it is why it is important to know not to invest more than one can afford to lose.
 
“If investors believed in the idea and could afford to hang on, or had a money management system in place to cut losses and then reinvest when the idea turned around, they were well rewarded. The Emerging Asian Portfolio rose 83.88% from July through October, 2006.  In three months, the $300,000 ($100,000 invested and $200,000 borrowed) portfolio gained $251,640, a 151.64% profit on the $100,000 base investment…in just three months! 
 
“Review what could have happened with the Emerging Asian Portfolio in just one year. 
 
“Investors who invested $100,000, borrowed $200,000 and held on through thick and thin for a year made 114.16%
On the $100,000 actually invested, they earned $114,160 in one year aand ended up with $214,160.   Not bad!
 
“Investors, caught in greed, who jumped in March 2006 and exited in fear in July of that year lost their entire $100,000 invested and could have lost $34,710 more!  That’s bad.
 
“These losses took place quickly, in just five months. Had the investor held their sandwich at Jyske Bank, the bank would have closed their position before it reached a negative position so their loss would have not been more than their original $100,000…probably even less.  That’s still bad.
 
“Had a really wise investor timed their investment right and invested $100,000 in July 2006 they would have earned
$151,640 on the $100,000 invested) in just three months.  That’s really good!
 
“Here are three important lessons:
 
“#1: Belief in the idea is vital.  Investors who believed in the idea and held on were well rewarded.
 
“#2:  Keep a good money management system.  Investors who had a money management system, set stops and exited before the March collapse and reentered in July made a huge annual return did the best of all (up to over 400% annual profit in a year).
 
“#3: Do not invest more than you can afford to lose!  In an utterly brilliant year (when viewed from the annual perspective), the seeds for incredible performance and total loss were in blossom.  
 
“Multicurrency investing is vital in this day and age.  There is no one currency that is totally trustworthy.  Multicurrency investing enhances safety. Leverage can make multicurrency investing even more profitable…yet every investor needs to question whether to use leverage or not. If they do, they must make sure the amount borrowed it is in tune with their goals and circumstances.   If they do the borrow low deposit high strategy to leverage multi currency investing can strengthens one’s financial security and profit potential as well.”
Gary Scott is an internationally recognized entrepreneur, author and investment advisor who offers seminars on investing with multi currencies. 

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Mastering the Emotions of Trading

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 3

Some would argue that the biggest barrier between you and success in trading the financial markets is time, money, software or strategy, but I would argue that the biggest barrier to success is simple human emotion.  Fear and greed.  Being able to stay calm when a trade turns against you and make a rational decision based on price/volume and support levels as well as being able to avoid the temptations of greed.. trying to squeeze more out of an extended trade is something that can’t be learned through paper trading and back testing.  Only when you have experienced the thrills of big gains or the agony of sharp losses can you learn more about your own emotions and who you are as a trader.  Only then can you begin to work to tame these emotions an increase your success.

A recent newsletter from Gary Scott describes the element of emotion so well:

" Change can come quickly…and does.  Knowing this fact can make you a millionaire.

This thought came to mind as Merri and I hiked over a deep ravine on a train trestle with our daughter Francesca.  Many readers write in and tell me how they plan to speculate in currency (or other commodity) futures, based on programs they have tested on paper.

Studying markets in advance is great but ….for those who plan to then move forward and speculate…may I suggest…buy a 12 foot two by four board.

Lay it on the floor.  Walk on it. All 12 feet. Unless you have an inner ear problem, or other mobility issue, walking the board is easy. 

Now go find a 100 foot chasm like the one below. Lay the board across the rift. Now walk across the board over the drop.  It’s the same. Right?  Can your emotions ignore the drop? Probably not. Mine certainly can’t!

Actually do not do this!  Hopefully the point is clear without the risk of death from a headlong plunge. The 12 foot walk is easy on the ground. Over the chasm it could be impossible……because of emotion. 

20% of good investing with real money is knowledge…80% is emotional control.

My experience suggests that 20% of investors look for change, calculate what the new horizons might bring and invest based on inner beliefs they stick to.  They do not get caught in the emotions of greed when markets rise.  Nor do they panic in the emotion of fear when markets fall.

80% of investors invest emotionally and lose.

Until next message, embrace change and embrace the reality of your emotional circumstances. Adjust your investing style accordingly."

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I recently had the great pleasure of joining Gary and his wife Merri for clam chowder as they stopped in Seattle during a cross country road trip.  I know that my life is enriched for having known them and highly recommend having a look at some of the seminars they offer in Ecuador and North Carolina.  Everything from investing in foreign currency markets to natural healing/health toSpanish lessons are offered.  I’m hoping to get to Ecuador early next year myself!  You can see more at http://www.garyscott.com/

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VOIP & Wireless Broadband – It’s a Small World After All

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

The following post is provided via the Gary Scott newsletter.  Gary lives and conducts business in a small town in Ecuador for a portion of the year, providing great insight into the ways technology is providing opportunities that were once impossible.  It truly is becoming a much small(er) world after all..

Technology Trends

We are traveling with a full house this week on our Import-Export Expedition. Yet wherever we go one great thing is that we are never far from home because of two evolving technologies.

With our tiny 12 inch by 12 inch, three pound plus laptops Merri and I can call my Mom, our kids, our friends or almost anyone, almost anywhere in the world, almost for nothing.

This is a trend that is transforming the utility of many people and places. This shift will create fortunes

We are visiting markets where one can buy organic Andean and Amazonian spices at low prices to pack and resell at high markups as part of our Import Export expedition right now.  We hope you will join us for our next expedition April 23-30.  Learn ways to have your own international business. See http://www.garyascott.com/catalog/expedition.html

We have turned an out-of-the way Blue Ridge Farm and a tiny Andean village into international business centers with this technology. Land that used to be worth a little is now worth a lot.  You too can cash in, if you figure out these dynamics before everyone else does.

VOIP (Voice Over Internet Protocol) and Wireless Broadband are changing the world. This knowledge is worth a fortune for more reasons than just the saved telephone tolls.

A few years ago I spoke at a seminar along with Ian Pierson the head futurist for British Telcom. One of the points he made was that he had advised BT (the largest phone company in the world) that within ten years they would not be able to charge for phone calls.

I wondered how this would take place. Now five years later, with VOIP, this is almost the case. Merri and I do not have a long distance carrier anywhere. We place all our calls through VOIP.

VOIP is a big part of the transformation, but wireless broadband is what really opens up this field.

We were lucky at our Blue Ridge farm because the telephone company decided to introduce DSL (telephone line broadband). This is because of the USDA (US Department of Agriculture) Rural Development Telecommunications Programs and Rural Development Broadband Loan and Loan Guarantee Program.

But most of the rural world does not have this type of politics at work. This is where there could be an even greater innovation, Wireless Internet Broadband (WIB).  WIB means that VOIP can be introduced quickly all over the world.

It is the combination of both technologies that give this evolution a one-two punch. WIB is the one of the two!

WIB is the best way to get broadband connectivity in rural and semi rural areas all over the world.

WIB is just like other internet plans, giving incredibly fast speeds and ‘always on’ features equal to cable or ADSL broadband technologies. However, the similarities stop there.

WIB customers connect to the internet wirelessly over the air, rather than through a phone line or cable. This means they get the benefits of broadband internet, plus freedom that only wireless internet can offer.

Years would have passed before wired broadband would have reached out tiny village of Cotacachi. Yet we have it now because all we have is a line-of-site radio tower.   

WIB is an ideal way for people who haven’t been able to get broadband otherwise. This is not satellite communication, but operates through tower transmitters just like cell phones. You get a very small dish pointed at a tower which may be miles away and viola! you have high speed always on internet.

This is great. I can communicate with you, my readers, all over the world through this amazing communications system. This is good enough but here is the #2 punch.

With VOIP my computer also becomes a phone. In North Carolina we use Vonage which provides a small computer box that connects to our computer and the phone.

In Ecuador we use SKYPE.  My computer and a headset is the phone.  We, in each case were allowed to choose a phone number anywhere in the world. We chose a Lakeland, Florida number so our daughter could call us with a local call.  But though she (or whoever) dials a Florida number, the phone (actually the computer) rings here in Ecuador (or wherever we happen to be) as long as we are connected to the internet.

Our calls out are extremely inexpensive. If we are calling someone who is also signed onto Skype, the call is FREE! Otherwise calling the US from Ecuador for example is about 2 cents a minute.

These two innovations change everything but I am not suggesting that you invest in VOIP or WIB businesses.

The big potential is from spotting how these two innovations change people, places and businesses. Look for distortions (as we have here) that are created by the change. For example, land here is cheap because it is viewed as remote.  Yet these technologies have erased the concepts of time and space! I can set up a business here with very low labor and real estate cost, but can serve clients in high cost areas! 

Here is another tip.  There will be two steps that take place in this evolution.  First, we will move from using computers to using interactive TV and the phone.

Too many people are afraid of computers because they are too user unfriendly. But everyone knows how to use the TV and the phone.

Second, we will shift from the typed word to voice. Not everyone can type but most of us can talk. These voice and gesture activated devices will be powerful in assessing your needs, sorting out data available and giving you a short list of useable information. You will no longer go to the net and ask a general question which may result in thousands of possible answers. You’ll be able to ask specific, personal questions and get personal, specific answers.

Look for ways that VOIP and WIB will change things and look for businesses that cash in on these easier to use interfaces.

These are trends that can make you rich.

More on this topic (What's this?)
Wireless Group Shifts Municipal Broadband Stance
Addressing Security Threats on VoIP Networks
Are You Ready For Wireless USB?
VoIP M&A: Onvoy to Acquire Broadvox
Read more on Broadband Technologies, Voip, Wireless at Wikinvest

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Water World

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 3

This post provided via Gary Scott, who sent the following to his newsletter readers a few days ago. 

International investments in water makes great business sense. The product is something everyone needs — in fact, after a few days you die if you don’t have it. Its uses are nearly unlimited: industrial, recreational, culinary, medicinal. There’s a limited supply, and an unceasing demand.

This is why we have been looking at international investments and water on this site for over five years.

Big trends in water are treating, purifying and providing it. About 85 percent of drinking water, and an even larger percentage of waste water services are provided by municipal-owned systems. Under the 1996 Safe Drinking Water Act many of these municipalities have to renovate their often antiquated systems. Many cities don’t have the money or the access to capital, so they outsource to profit-making companies.   

This is why last November we looked at Insituform Technologies, a leader in trenchless water line replacement. (See http://www.spottingtrends.com/investment/investment_natural_resources_9.htm).

Insituform’s share price has risen from $19.20 to $25.30 in this last three months since we wrote about it.

Today’s focus is in Europe which has had water problems even longer than in the US and has many companies that provide water services globally.  It should come as no surprise that Europe have some of the largest water companies.

France is home to some of these large water companies. One of these firms is Suez Lyonnaise des Eaux, formed through a 1997 merger between Compagnie de Suez (the company that built the Suez Canal and then became a bank) and Lyonnaise des Eaux (a water company with operations in the United States, Australia, Russia, Brazil, Spain and more). After the merger, the company’s name became Suez Lyonnaise des Eaux and was subsequently shortened to Suez in 2001.

Suez, trades on the Paris Bourse under the ticker symbol LY and several years ago adopted American business management methods, sharpening its focus and aiming to benefit shareholders, not just employees and managers.

In the summer of 2002, Suez merged its water and wastewater services into a division called Suez Environment.
Its water and wastewater business , is the second largest in the world. Suez provides water-related services to more than 115 million people worldwide. Its other business areas are electricity, natural gas, water and waste management. Suez also maintains interests in television and broadband distribution. In 2001, Suez was ranked 99th on Fortune’s Global 500, and in the same year it was ranked 19th in the world among companies with the greatest international presence, according to the United Nations World Investment Report.

Suez Environment supplies sustainable solutions for essential environmental services (water, sanitation and waste services) to industrial and individual customers around the world.

Their water services include:

   * Design, construction and startup of water treatment plants (drinking water, desalination, wastewater, and sludge treatment).
   * Production, treatment and distribution of drinking water.
   * Sewage treatment and sludge recovery.
   * Rainwater collection and treatment.
   * Optimization and complete management of the industrial water cycle.

Their waste services include:

   * Collection of domestic waste, non-hazardous and hazardous industrial waste.
   * Sorting, recycling and biological recovery.
   * Incineration with waste-to-energy recovery.
   * Landfill disposal of household and industrial waste.
   * Urban and industrial cleansing.
   * On-site and polluted-soil treatment.

SUEZ Environment did EUR 532 million in 2005 and recorded a +5.1% organic growth rate vs. +1.6% in 2004. This growth was driven by water in Europe (EUR 162 million, +5.1%) and international activities (EUR 169 million). Waste services in Europe (EUR 83 million, +1.8%). The firm recorded increases of 3% in France and 3.6% in the UK, while activity in Germany grew during the 2nd half.

Suez shares are also traded in Frankfurt, Brussles, Zurich and Suez ADRs trade on the New York Stock Exchange with the code SZE. The ADRS have traded between $26 and $37 in the last year and are in the $35 range now.

Suez is a natural resource blue chip of the world.

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A followup message a few days later takes a look at an investment trust focusing on the water industry:

Our messages have been looking at the potential of water investments for over five years. Our belief is that water is an investment commodity and its value will grow.

In the U.S. alone, water demand has tripled in the past 30 years, while the population growth has been just 50%.

The 2003 Needs Assessment indicates that community water systems and not-for profit non-community water systems need $276.8 billion over the next 20 years to install, upgrade and replace infrastructure.

There are many influences that should drive growth in U.S. water companies.

First, census figures show that the American population is growing strongly.  This increases the need for new or improved water infrastructure.

Second, there is a trend toward privatization and outsourcing of government water operations.

Third, the water industry is becoming increasingly sophisticated.

Fourth increased regulations regarding water creates opportunity in both the U.S. and abroad.

There is also growing consolidation in the water industry.

Water may be the most undervalued commodity in the market.

Plus this is a recession resistant, predictable and profitable industry. Yet which water companies should we choose?

Many investors prefer to leave the specific decisions to professionals. There are mutual funds and investment trusts that invest in water, such as the Global Water Equities Portfolio.

This is an investment trust focused on investing in the utility sector along with some foreign and small-capitalization companies, all doing business somehow related to water.

The trust is managed by Boenning & Scattergood, the oldest independent investment firm in the Philadelphia region.  This firm has been in business for over 90 years and has developed a particular expertise and knowledge of the water industry, including water utilities, filtration, equipment, chemical and engineering companies.

Boenning & Scattergood select the securities and provide ongoing support relating to the U.S. Water Equities Portfolio, looks for businesses that intend to operate in a socially and environmentally correct way. They search for those that earn primary revenues and growth from some aspect of the domestic potable water industry, including: water supply, pumps and pipes, machinery and equipment, filtration and purification, compliance and testing, utilities, metering and distribution, construction and engineering, wastewater treatment and recycling.

Recent portfolio holdings include:

CONSUMER DISCRETIONARY    3.00% of Portfolio
POOL SCP Pool Corporation

H E A LT H C A R E 1                 .9 5 %
Millipore Corporation

I N D U S T R I A L S               66.0 3 %
3M Company
A.O. Smith Corporation
Danaher Corporation
ESCO Technologies Incorporated
Flowserve Corporation
Franklin Electric Company Incorporated
General Electric Company
IDEX Corporation
ITT Industries Incorporated
Lamson & Sessions Company
Layne Christensen Company
Lindsay Manufacturing Company
Mueller Industries Incorporated
Pall Corporation
Pentair Incorporated
Pico Holdings Incorporated
Roper Industries Incorporated
URS Corporation
Watts Water Technologies Incorporated

MAT E R IAL S                             9.97%
Arch Chemicals Incorporated
Calgon Carbon Corporation
NLC Nalco Holding Company

U T I L I T I E S                         1 9.0 5 %
American States Water Company
Aqua America Incorporated
California Water Service Group
Middlesex Water Company
SJW Corporation
Southwest Water Company

This trust is offered by Claymore Securities, Inc. www.claymore.com

The code for this trust is CGWEAX.

Investors who want a broad spectrum of water investments should investigate trusts such as this.

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Gary is a guest author here at the SelfInvestors blog and provides a look into investing trends, specifically in world markets.  If you’d like to sign up for his daily newsletter or one of several seminars throughout the year in Ecuador and North Carolina, you can get all the info at his personal site.

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Why the Dollar Can Be Strong

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Why the Dollar Can Be Strong by Gary Scott

Recently an astute reader asked me this question.

“Gary, I am really curious why the US$ has been so strong for the last year. Any hint? Sincerely, Rudy”

We may all profit from the research that went into my reply to Rudy.

First keep in mind that though the dollar has been strong, it is falling now. At least in the short term. The January 7 Economist, says:

“The dollar suffered its biggest two-day drop against the euro in two years, hitting a two-month low of $1.21 against the European currency on January 4th. The dollar stumbled after the release of the minutes of the December meeting of the Federal Open Market Committee, which signalled that interest-rate rises may be nearing an end.”

The yen is also appreciating rapidly right now and of course gold is sky rocketing.

But we should not speculate on a dollar collapse without caution. Let’s look at some statistics and see all the pressures that might push the dollar down and up.

First on the downside America’s trade deficit has been pushing down on the greenback for many years.
The huge negative current account deficit is at 6.5% of Gross Domestic Product (GDP) and this also places downwards pressure on the buck. Europe has a small current account surplus of 0.1% of GDP and Japan’s surplus is very high at 3.3% of GDP.

Stock market moves in 2005 also favored Europe and Japan over the US. Europe ‘s exchanges were up 9.7% overall. Japan’s market was up 25.5% versus a 5.1% rise in the S&P and 4% NASDAQ growth. But right now Wall Street looks strong at a time when it is traditionally weal.

Yet there are are plenty of reasons for the dollar to have some strength at this time.

First keep in mind the strength of its rebound. If we take a longer view, the dollar has fallen seriously versus the euro. Sure its up from its bottom back about a year and a half, but it is nowhere near the parity it was few years ago. Part of correction now may just be a bounce back.

Plus most countries want a strong dollar and many support the buck by buying it. They want their products to remain cheap in America. US spending has stimulated the global economy and no one wants this to change, except American firms that export. So speculators have to beware of government intervention.

Asian and other nations are also buying US businesses and or investing in new plants in the US. This attracts money to America and increase demand for the dollar.

In addition America is not the only economically mismanaged nation. The US budget deficit, as bad as it is at 3.7% of GDP, is not that much worse than Europe’s (-2.9%) and the US deficit is much better than Japan’s horrible –6.5% of GDP.

Europe’s overall debt (if we can believe the statistics) is 71.3% of GDP, about the same as in the US. Japan’s debt is seriously worse at a whopping 144% of GDP, double that of the US!

US unemployment figures look pretty good at 4.9% of the work force versus 4.6% in Japan and 8.8% in Europe.

Japan and Europe also share America’s aging problem,

I suspect that the greatest US dollar strength has come from interest rate differentials. 3 month dollar CD rates rose to 4.22% up from 2.54% in the last year. Euro CDs only pay 2.49% and the yen rate is basically zero. Bond rates in dollars were also much higher, 4.36% for ten year bonds compared to 3.29% in euro and 1.52% in yen.

For the year ahead watch the stock markets and interest rates.  PLus the price of gold. My guess (and predicting currencies is always a guess) is that currencies with the highest interest yields and hottest stock markets will be the ones that will see the greatest strength. Plus the dollar yen and euro will weaken versus gold.

Until next message I hope your global investing sees great strength as well.

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Gary is a guest author here at the SelfInvestors blog and provides a look into investing trends, specifically in world markets.  If you’d like to sign up for his daily newsletter or one of several seminars throughout the year in Ecuador and North Carolina, you can get all the info at this personal site.

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I thought I’d throw up a couple charts of the US Dollar Index to give another perspective on where the dollar is headed.

First the long term 15 yr view which shows very strong support at 80.  Notice the severity of the decline in the dollar from ’02 to ’05.  While the dollar recovered significantly in ’05, that kind of drop typically needs a considerable amount of time to recover from, indicating the dollar could bounce around the 80-90 level for quite some time.. perhaps another year or two.  That’s assuming that it will hold up above 80.  Of course, a drop below 80 for another leg down is a possibility, but support is very strong there so it isn’t likely.

12605_usdollar_long

Lets look at the shorter term view.  The year long uptrend that began in early ’05 is clearly breaking down indicating further weakness ahead for the dollar.. at least in the short term.  You can see how the support line of the uptrend is now acting as resistance.  Furthermore, support of the 200 day moving average has been taken out as well.  Possible support areas to watch: 87.50, 85 and 80. If I were to make I prediction I’d say that the dollar retests support at 80 sometime over the next 12 – 18 months before heading higher.

12606_usd_short

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Welcome Gary Scott! – It’s Inverted

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 2

Good morning, I’m very pleased to announce the addition of Gary Scott as a guest author here at the blog.  Beginning today, I’ll be posting selected editions of his daily newsletter in addition to some original content Gary may post from time to time.  Gary Scott is an economist and author of 36 international books and reports on investing.  For years, his World Reports newsletter was read by thousands of readers in 82 countries.  Gary began preaching the importance of global investing more than 30 years ago and wrote a monthly column under the bi-line “The Global Guru”, for “On Wall Street”, a large US circulation magazine for stockbrokers.

Ted Nicholas, one of America’s best selling self-publishers and foremost entrepreneurs, wrote “Gary Scott enjoys a worldwide reputation. He is an entrepreneur, author and investment advisor extraordinaire. While today it’s commonplace, Gary Scott was the first advisor 30+ years ago who recommended international diversification for the small investor. At first, many thought he was crazy. Of course, today the establishment advisors are on the bandwagon. Gary’s investment tips have probably helped more investors get rich than any advisor in the world!"

Gary’s “big picture” posts will prove to be a great compliment to the shorter term technical analysis of the markets and specific companies that I have provided here for the past couple years.

It’s Inverted by Gary Scott

In classical economics there is an economic cycle that normally swings from boom to bust and back again. Three different parts of the cycle create opportunity. 

One opportunity appears at the top of the cycle when the economy is at its peak. Business is booming. Everyone is getting rich. Share prices are high and racing upwards. There is rising inflation, short term interest rates are being pushed up, bond yields rise, unemployment falls and PE ratios expand. This is a good to time to sell shares and hold cash (CDs and short maturing bonds) that generally pay high interest.

Then the good times end. The economy peaks, inflation slows down, interest rates rise, there is depressed demand, rising unemployment and PE multiples contract. This offers the second opportunity as a good time to use that cash you are holding to invest in longer term bonds.

The economy slides towards recession. The yield curve inverts (short term rates are higher than long term rates) and finally reaches the bottom of the cycle. The economy has slowed way down. There is a rush for liquidity, , authorities relax monetary supply, there is high unemployment and a high level of uncertainty. Share prices have dropped and PE ratios are high. This, (when everything looks bleakest) is the third opportunity, a good time to buy shares.

Then the economy spurred by low cost labor and money picks up and works upwards into the next boom.

I share these facts because recently the yield curve on US Treasury bonds has inverted.

The yield curve measures the yield on interest-bearing instruments at various dates of maturity, from one day to 30 years. It compares the short-term rate with the long-term rate. For example right now, three-month US Treasury notes are yielding 4.35% and 6 month 4. 36% and one year notes 4.37%. This is as it should be. What is out pf place is that these rates are higher than the two-year to 8 year notes. At this stage there are only a few basis points and this could have little meaning.

However, if the trend becomes stronger it could be a warning that tougher economic times are ahead. This would suggest shifting emphasis from shares to cash.

This can also warn of a US dollar dip. Let’s keep our eye on the yield curve and enjoy good investing!

____________________________________________________________________

If you’d like to see more about Gary or sign up for his daily newsletter, check out his personal site at www.garyascott.com

Currently, Gary and his wife Merri spend summers and conduct seminars at their 250
acre farm in the Blue Ridge Mountains (www.littlehorsecreek.com)  and
winters at their 800 acre hacienda in Ecuador (http://www.garyascott.com/archives/2003/01/27/index.html)

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