Will Oil Crack Your Nest Egg?

by Natalie Pace, #1 stock picker in the US, with 66% annualized gains (according to TipsTraders.com, an independent ranking agency)

10 Steps to Protect Your Retirement NOW

The hard truth is that if you didn't understand what you were checking off when you enrolled in your 401K or if you have a large amount of stock in the company you work for, you are as vulnerable to a market downturn TODAY as you were in 2000-2002. The markets still haven't recovered to their 2000 levels, and while the risks have shifted, from worries of deflation to worries of inflation, there is still enough volatility in the economy (oil prices, terrorism, inflation, rising interest rates) to spark a sell-off. That doesn't mean the Apocalypse or the Depression is just around the corner, but merely that the money you put into your 401K could go down - and between 2000-2002 portfolios dropped by 20-70% -- whereas, if you are properly diversified, you can protect yourself.

Don't wait. Protect yourself now.

So many of us are looking for millionaire tips, and ignoring the most fundamental and important treasure that we already have stored in our retirement plans. Learn how to properly protect and grow your nest egg, and you lay the foundation for prosperity.

Did your broker or human resources person tell you about diversification and how it protects your portfolio from a fall-out in any particular sector? As Maria Bartiromo said in an interview last February, "It's important to always have a horde of cash for emergencies. Then you have your long-term retirement plan, your cash account and an account for stocks, where you can take on risk. How much risk depends upon your age."

So, how do you protect and grow your nest egg? First consider a few important trends that may seem whimsical, but are in fact key.

1. Cash was the Top Performing Asset in 2000.
2. Championship teams employ great defense, as well as offense. (Dennis Rodman has five NBA championship rings.)
3. The hare wins the 100-yard dash.
4. Jaba the Hut rules the universe (by acquiring or sidelining the hare).

Now, how can these strange aphorisms help you protect and grow your 401K? It's easier than you might think, and, if you're lucky, you won't even need a calculator (although you will need an appointment with your certified financial planner and/or human resources person).

1. Return on Investment. Find out your return on investment in your 401K over the last 5 years. Visit your broker, certified financial planner or your human resources person and ask them to provide you with the percentage gains that your portfolio has earned since January 2000, along with the percentage gains you have earned over the life of your portfolio. This will give you an idea of how well your investments have been performing, how vulnerable your portfolio is and where you might wish to cash out, should you choose to protect more of your hard-earned retirement dollars.
   If your financial planner, broker or human resources person starts using acronyms and market vernacular that you don't understand, remain true to your request and get the numbers that you need. As George Orwell notes, "The great enemy of clear language is insincerity." If you have to check the numbers on your own, multiple your monthly dollar contribution by how many months you've been contributing. Hopefully, your nest egg is bigger than that amount, and you can subtract your contributions to find out how much your investments have earned. If your contributions are bigger, then subtract your total nest egg value to find out how much you have lost. For example, if your 401K has a total of $5,000, and your contributions were $4,000, you've made a 25% return. If that return is over one year, you've done great! If that return is over 10 years, that's lower than what you would have received in a money market account, where you would have had no risk. The money markets are a line item on your 401K. Make sure you have some of your nest egg protected there.
   
   
2. Portfolio Diversification. Find out how much of your 401K is in a money market account. As a general guideline, you should have a percentage equal to your age in completely SAFE territory. Today, safe territory is the money market account, where you can achieve bond like returns with no risk. If you are 50 and you have all of your 401K invested in mutual funds (or even more than 50%), you might not have enough money to retire on, especially in the event of a downturn. Unfortunately, that was the case for many former Enron and Global Crossing employees. By putting an appropriate percentage into the money markets, you ensure that at least that portion of your portfolio will NOT go down. If your financial professional has not adequately advised you about portfolio diversification, you might consider finding one who will be proactive about your best interests. Read my article, "Brokers and Lovers, It Pays to Pick a Good One," in Vol. 2, issue 4 for 10 questions you need to ask when interviewing the perfect financial partner.
   
   
3. Bonds. While bonds are traditionally considered to be "safe," when interest rates rise, bonds go down, and can produce negative returns. For this reason, many money managers today point to money markets for bond-like returns and no risk, as the safe haven for your portfolio. Timothy Middleton, a commentator for MoneyCentral.MSN.com writes, "The simplest way to reduce risk in a portfolio is to hold a significant fraction of it in cash. Money-market accounts and Treasury bills have essentially zero volatility."
   
   
4. Weed. When looking to readjust your portfolio, prune out the weeds! What are the weeds? Certainly mutual funds that are losing money, but also companies with extremely high debt/equity ratios (auto manufacturing, airlines, Fannie Mae, Freddie Mac, steel manufacturers, auto parts), extremely high pension liabilities (see the end of this article for a list of companies), companies that could be severely impacted by high oil, metal and medical prices (retail, including Wal-Mart, auto parts manufacturers, steel manufacturers). Choose index funds over mutual funds, and weight more to small and mid cap, over the larger companies, especially any company founded before 1980, which may be carrying a lot of pension fund liability. As a general guideline, choose Eastern Europe over Europe and Hong Kong, Singapore and Taiwan over Mainland China. Paul Woods, the CEO and President of Odyssey Advisors money managers, will be writing an article for the October ezine with his index funds picks, designed especially for those of you who have limited choices in your 401k.
   
   
5. Harvest. Take your profits! If you have an area of your portfolio that has done extremely well, consider locking in the gains by cashing out of the holding. What are great gains? A-list stock pickers are boasting of 15% annualized gains. If you've made more than that on a stock, you've done well. That doesn't mean that you want to blindly pull out your profits at 15%, but in a market that is expected to perform modestly year over year, great gains are made in shorter windows. The more actively you prune your portfolio, the more beautiful it will become.
   
   
6. Take Profits in Shorter Windows. "This is a stock picker's market. Some sectors will perform better than others because there is this imbalance in supply and demand--energy, for instance and drilling and exploration," Robert Hormats, Vice Chairman, Goldman Sachs International, said in an interview on 2.8.05. You are not going to want to day-trade with your entire portfolio, but if you want to see better returns, consider taking a small portion and actively managing it. To ensure greater returns, find a stock newsletter with a great reputation for picking stocks and follow their advice. Don't blindly follow Jim Cramer or Motley Fool or Louis Navallier. Check out the returns and find the publication/person who best fits your own philosophy. NataliePace.com, BuyBackLetter.com, IQTrends.com all have outstanding performance, as measured by independent organizations, and each operates under a different philosophy.
   
   
7. Cash the Top Performing Asset in 2000. Just thought we'd repeat that fact. Get liquid, and be generous with the percentage of cash (money markets) you have in your 401K. Consider adding more than your age to the percentage. (In bear markets, you want to be more conservative.) Why? Liquidity allows you the flexibility to buy when/if there is a market downturn in any sector - stocks, bonds or real estate. That way, while others panic that they can't pay their bills, you'll be patient and wait for an affordable price. The buy low, sell high dream is made possible with forethought - i.e. Getting liquid so that you are in a position to buy low.
   
   
8. Real Estate. "Buying residential real estate right now is like buying stocks in March of 2000." Richard Cripps, chief market strategist, Leggs Mason Capital Market. Don't buy high, banking on the future being as outstanding as the past. Chances are that you are chasing gains that have already been made. Read Steve Dietrich's article, "Buying Real Estate in Today's Market," for tips on what to consider if you're interested in buying real estate today.
   
   
9. Jaba the Hut. "Companies with the smallest market capitalizations produce the highest returns. As companies get bigger, returns go down until you get to the blue chips, which produce the lowest returns of all." Paul Woods, President and CEO, Odyssey Advisors, money managers. It's important to remember the other part of the aphorism, however. Blue chips, like Jaba, are less vulnerable than the hare. They are stabilizing forces. Make sure your blue chips aren't weeds, however. In general, companies founded after 1980 are in a better position than those founded before, when benefit-based pension plans were popular. Today, Microsoft and Genentech have replaced AT&T and General Motors as stable, blue chip companies. Read the article, "Skype Hype" in this month's NataliePace.com ezine, to learn more about the problems with AT&T.
   
   
10. Betting on the Hare. "Many of you have retirement plans or 401Ks that offer a choice of investments. In making these allocations, if you focus on smaller companies and value, you're likely to have to work fewer years and end up with a larger nest egg at retirement." Paul Woods, President and CEO, Odyssey Advisors, money managers. Do not put all your money in a small cap value fund. Diversification is an important way to protect your portfolio.
    
    
11. Consider Cashing in Options and/or Stock in the Company You Work For Now. It isn't a profit until you cash it in. How many times did you hear stock braggarts talking about how much money they'd made on AOL in early 2000? AOL went from $90 down to $10 and Time Warner (owns AOL) is still hovering at $18. Global Crossing employees lost everything. Talk to your human resources person about any terms or conditions that might prohibit you from cashing in some of your company stock, and consider cashing in at least a portion, as quickly as possible, before the ripple effect of high oil and energy prices starts limiting the spending power of consumers and thus the bottom line of corporations.
    
    
12. 401 K Penalties. If you are worried about being penalized for making changes to your portfolio, consider two things. 1) You may be able to roll your 401K over to a brokerage without penalty, especially if it is held in an old employer's account and/or the current employer has recently made changes to the plan. 2) Is the penalty a small price to pay for ensuring that you are adequately protected? Don't wait too long to reallocate some of your position to a safe haven, especially if you have almost all of your retirement in mutual funds and none in the money markets. There have been a lot of losses incurred over the past few years by people worried about paying taxes or penalties.

Why am I Emphasizing Defensive Strategies?
Americans are Over-Leveraged
"The sizable gains in consumer spending of recent years have been accompanied by a drop in the personal saving rate to an average of only 1 percent over 2004Ña very low figure relative to the nearly 7 percent rate averaged over the previous three decades." Alan Greenspan, Chairman of the Federal Reserve Board. The Home Equity Line of Credit (read here: consumer ATM machine) can't keep spitting out $20s forever.

Energy Prices Aren't Going Down
"The next few years may be stressful ones for energy consumers, as stretched and uncertain supplies of oil and other conventional energy sources face the growing demands of a rapidly expanding world economy," according to Ben S. Bernanke, the new chairman of Bush's Council of Economic Advisers, in a speech on 10.21.04. The experts have known this for over a year.

The Feds Might be Lying About Inflation
"The CPI as calculated may not be a conspiracy but it's definitely a con job foisted on an unwitting public by government officials who choose to look the other way or who convince themselves that they are fostering some ... New Age Economy." Bill Gross, Chief Investment Officer, PIMCO Bonds.

You don't need Consumer Price Index numbers to tell you that you can't afford gas any more or that your recent property tax bill nearly stopped your heart. Have you been tempted to take a loan out on your 401K to pay property taxes, or to remodel or to get to work? Are you siphoning off living expenses from the Home Equity Line of Credit that you had earmarked for buying an apartment building? How are you making that higher tuition payment, or that higher medical insurance premium or--and hopefully this doesn't apply to you--those unexpected medical costs?

The fact is that, even with the highest oil prices (inflation adjusted) in history, no one seems willing to admit that inflation is running hotter than Mt. Etna. How does this happen? Whether it is because the reports don't include the most expensive items in your budget (food, gas and housing) or because most of Wall Street is on vacation, you can bet that the party cannot go on forever. It's almost guaranteed that market professionals, if they were in the office, would have pushed the sell-off price down significantly August 12th, when oil prices hit $67/barrel. Trading volumes were weak, as they typically are in summer, while Wall Street professionals sunned in the Hamptons.

If those assumptions sound too speculative for you, consider the similarities between today's market and the market of 1979, when oil prices where hitting record highs, and other global risks, like terrorism and nuclear waste, were exploding across world headlines.

Stock Chart of Ford Motor Company, Dow Jones and the S&P 500 in 1979

Chart: MoneyCentral.Msn.Com

Timeline 1979
2.1979 Federal Open Market Committee expects inflation to be flat or to decline and for growth to be strong.

3.28.79 -2% Market Drop. 3-Mile Island. Partial core meltdown occurred in Middletown, Pennsylvania. This was big news and sparked a nuclear fallout phobia in the U.S.

6.28.79 -1% Market Drop. OPEC significantly raises the price of crude oil. High energy prices spark inflation. The fallout in the stock market was shorted lived, however, and the markets continued to advance over the summer.

8.6.79 Chairman Paul Volcker sworn in as head of the Federal Open Market Committee. Markets continue to look strong.

9.7.79 The Chrysler Corporation asks the U.S. Government for $1 billion dollars to avoid bankruptcy.

10.6.79 Markets drop -10-12%. Major monetary policy reform issued to allow flexibility for more robust policies to counter inflation. This special meeting of the Feds was scheduled in secret and on very short notice. The next regularly scheduled meeting of the FOMC was supposed to have taken place on October 16, 1979.

11.4.79 Markets drop -2%. Iranian militants seize U.S. embassy in Tehran, ultimately holding staff hostage for 444 days.

12.31.79 The S&P 500 finishes the year with +10% gains (on the Santa rally). The Dow Jones Industrial Average finishes out the year flat.

1.1.82 After falling over 60% since October 1979 and staying there for over two years, the stock of Ford Motor Company begins to heal.

So, what happens when inflation soars, interest rates strangle the housing market and bonds enter a bear market? Does the money run over to stocks? Not traditionally. People are staggering to fend off their creditors. Many have to cash out stock positions in order to stay afloat. (Are you seeing this in any of your friends yet?) As James Tobin, Nobel Laureate in Economics, noted in his Nobel Memorial lecture on December 8, 1981, "Belief that inflationary periods will be stagflationary because of counter-inflationary monetary policies would lead households seeking hedges against unemployment and lowered real wages to short-term dollar-denominated assets bearing market interest ratesÉ rather than to equities or long-term bonds."

Controlling inflation by raising interest rates and deflating the housing run is a bitter pill to swallow. It always puts someone's dream of becoming a millionaire to rest, at least temporarily. If you want to make sure that your nest egg isn't the one in the infirmary, take steps to protect and beautify your bottom line now.

Final Note:
As early as last December, three respected economists affiliated with the Federal Reserve wrote a paper analyzing Chairman Volcker's strategies for containing inflation, "attempting to draw lessons for the present day from the October 1979 policy reform," specifically because "it seems necessary to classify the essential characteristics that made Chairman Volcker's FOMCs successful at fighting inflation and setting the stage for Chairman Greenspan's FOMCs to finish the job." The authors, David E. Lindsey, Athanasios Orphanides and Robert H. Rasche (see below for their bios) concluded that, "The plan while undoubtedly not perfect, turned out to be pretty goodÉ And, perhaps as important, it instilled a focus on controlling inflation and inflationary expectations as an enduring aspect of Federal Reserve monetary strategy." To view, "The Reform of October 1979: How it Happened and Why", by David E. Lindsey, Athanasios Orphanides and Robert H. Rasche, click on the title.

31 Companies With Projected Pension Benefit Obligations that Exceed Equity Market Capitalizations

(Source: Credit Suisse First Boston, "the Magic of Pension Accounting," 9.27.2002)

20 of the S&P 500 companies that are most deeply in the red on pension plans.

Source: Standard & Poor's

David E. Lindsey, before his retirement in 2003, was deputy director of the Division of Monetary Affairs at the Board of Governors of the Federal Reserve System. Athanasios Orphanides is an adviser in the Division of Monetary Affairs at the Board of Governors of the Federal Reserve System, a research fellow of the Centre for Economic Policy Research, and a fellow of the Center for Financial Studies. Robert H. Rasche is senior vice president and director of research at the Federal Reserve Bank of St. Louis.

Worried About China?

Trade Is the Pathway to World Peace, according to Jim Michaels, former Editor of Forbes magazine. Q&A with Mr. Michaels.

James W. Michaels Group Vice President-Editorial of Forbes Inc

"Trade is a path to peace. Japan & Germany in the aftermath of World War II show that you can gain a lot more through trade than you can through war. Trade has been the greatest antidote to war since World War II." Jim Michaels .

Natalie -- Concerns of Outsourcing and the amount of T-bills held by the Chinese have many Americans concerned. What's your take on the current state of affairs?

Jim -- First, let's drop back and let me point out that all major wars were countries trying to expand and gain control of resources and markets. After WWII, systems were set up to encourage free trade. The result was that Germany and Japan, who tried to win prosperity by arms and had their heads handed to them, won prosperity by trading. Neither country wants to go to war again.

And you think that should allay fears of a conflict between the U.S. and China?

Jim -- The answer is the same as it was in the aftermath of World War II, if we engage China in business and trade, there is no need for conflict. We're much less likely to bomb each other because we'd be bombing our own property. By achieving prosperity through trade, there's no motivation to do it through war. Our common interests are far greater than our antagonisms.

What are our common interests?

Jim -- The Chinese benefit in jobs and huge exports. For the United States, by manufacturing in China, American companies bring costs way down and become more competitive in the world than others who don't. Dell and Hewlett Packard are manufacturing in China and Southeast Asia. American companies create huge numbers of jobs here. We've thrown our lot together.

That's the biggest concern--that American jobs are being lost to the ChineseÉ

Jim -- American plants have closed, but far more jobs are created here by the prosperity of the companies. And there are tremendous benefits for the American consumer. Most garments are made abroad. American consumers get goods at a far lower price than if there were manufactured here. It does create tensions, but the benefits far outweigh the irritations. It's hard to tell that to some poor man or woman who loses a job.

You've said that the Treasury bill debt to China and its provinces is at almost a trillion dollars.

Jim -- It's close to that. It's a huge amount of money. However, buying our Treasury bonds keeps interest rates down. It is a principle reason for the housing boom. Interest rates are way below what there were 15 years ago. If the Chinese had not been willing to fund the U.S. housing market, no one would be able to afford their homes.

What about concerns that the U.S. is heavily indebted to the Chinese, and that makes us extremely vulnerable to their whims?

Jim -- As John Dessauer said, "If we start excluding the Chinese, putting obstacles to economic development, they are more likely to turn to aggression to get what they need."

So trade prevents aggression?

Trade is a path to peace. Japan and Germany in the aftermath of World War II show that you can gain a lot more through trade than you can through war. Trade has been the greatest antidote to war since World War II.

James W. Michaels is Group Vice President-Editorial of Forbes Inc. Previously, he had been Editor of Forbes magazine since July 1961, retiring in January 1999. During his tenure as Editor of Forbes, the magazine's circulation grew from 321,000 to 765,000. Mr. Michaels' dispatches on Gandhi's assassination have been reprinted in Simon & Schuster's A Treasury of Great Reporting (a compendium of the "100 greatest news stories of all time"). Mr. Michaels holds a B.A. in Economics (cum laude) from Harvard College (1943). He is a graduate of Culver Military Academy.

The Yin & Yang of the Yuan $ Decoupling.

By Meri Anne Beck-Woods

This is the Yin-yang symbol or Taijitu (太極圖), with black representing yin and white representing yang. It is a symbol that reflects the inescapably intertwined duality of all things in nature, a common theme in Taoism. No quality is independent of its opposite, nor so pure that it does not contain its opposite in a diminished form: these concepts are depicted by the vague division between black and white, the flowing boundary between the two, and the smaller circles within the large regions. (Source Wikopedia.com)

Meri Anne Beck-Woods, Chairman & CFO, Odyssey Advisors LLC.

On July 21, 2005, China unpegged the Yuan from the U.S. dollar, and while the magnitude of change was small it was a symbolic victory for U.S. and European critics of China's unfair trade advantage based upon its undervalued currency...

During the 2004 election year candidate Kerry and incumbent Bush both threatened controls on trade to increase the price of Chinese goods. Treasury Secretary John W. Snow repeatedly called for an upward revaluation of the Chinese Yuan relative to the dollar. The US global trade deficit (goods and services) widened from $375 billion in 2000 to an estimated $575 billion in 2004 (source: U.S. Bureau of Economic Analysis, 2004).

Now instead of being valued solely against the dollar, the Chinese Central Bank's Governor Xhou Xiaochuan stated that the Yuan would be valued against a basket of currencies, depending on the amount of foreign trade conducted, with the specific countries represented in the basket (Reuters 8/18/05). This implies that China's biggest trading partners, currently the U.S., Europe, Japan and South Korea, would have currencies making up the basket for valuation purposes. According to Deutsch Bank in Singapore, the dollar would have an estimated 30 per cent weighting in the basket, the yen and euro 20 percent each, and the South Korean won 10 per cent.

The United States, unfortunately, for many years now, has borrowed from Yin to pay Yang with an increasing federal deficit, global trade imbalance, and dependency on foreign governments to invest in U.S. dollar denominated notes and bonds... Think of China as a vacuum cleaner with increasing power to collect natural resources, such as oil and other industrial growth building blocks, at an ever increasing speed and lower cost than its trading partners... This is largely due to China's impressive economic growth as reflected in the Bloomberg LP Economic Forecast Summary shown below:

The ramifications for both the U.S. & China are both positive and negative. For U.S. consumers and American companies the price of Chinese goods will increase and lessen imports. While this will help the trade deficit, there could be a negative impact resulting from higher prices and more concern about inflation. For China, existing debt to other nations is reduced and the cost of all those natural resource materials just got cheaper. Many economists, including Ben S. Bernanke, the new chairman of Bush's Council of Economic Advisers, cite the Chinese economic growth machine as a primary reason for increasing prices in crude oil, copper, and steel.

Some of the darker results of revaluation for China would be a slow down in growth based upon more expensive exports and a possible increase in unemployment as other emerging market countries like Indonesia and India have a stronger competitive position, reducing the number of manufacturing jobs. American companies, like Wal-Mart, will see an immediate increase in the cost of goods sold, impacting profitability and earnings growth.

China's gradual upward measured revaluation is geared towards lessening the impact of more speculative investment activity by leading hedge funds around the world, which could cause major movement in the value of the Yuan. Also the large percentage of U.S. debt owned by China is now lower in value, and the future investment choice for China might not be U.S. Treasury notes and bonds but euro currency debt instruments. According to the U.S. Treasury Department, China is the second largest holder of US Treasury debt, approximately $291 billion, second only to Japan. A sell off of U.S. dollar holdings could negatively impact the bond market as many countries such as Russia , India, and South Africa are suspected of diversifying their foreign exchange reserves according to the latest Bank of International settlements report.

Many U.S. industries have suffered from the absence of enforcement of intellectual property rights particularly the movie, music, software, and industrial segments of the economy. The so called "China Factor" has been blamed for current record high oil prices by the US Energy Department saying the sharp increase of China's oil imports constitutes one of the major reasons for the price hike in the world oil market.. Estimates by the Canadian Energy Institute (CEI) state that in 2001 and 2002 the 10 countries of OPEC (Iraq not included) had a spare capacity of 4-5.5 million barrels per day, but that figure dropped to 2.9 million barrels per day in 2003 and 2004 saw an even larger drop to 1.9 million barrels.

To oil producing countries, the Yuan revaluation and the revaluation of other Asian currencies would mean the US dollar's devaluation. Their revenues from oil exports will shrink as a result and they will have to sell more oil to achieve the same revenue levels. At the same time alternative fuel sources are becoming more reasonable relative to the current price of oil at $63.27 dollars per barrel. According to Bloomberg LP from 2/18/05 to 8/18/05 the average price of a barrel of oil has been $56.705, with a high of $66.86 on 8/12/05 and a low of $48.43 on 2/18/05.

Chinese companies have been trying to buy US oil companies without much success and well known brands like Maytag. Intervention by the U.S. Government to prevent this type of acquisition does not augur well for continued free trade. One of the segments of both the U.S. and Chinese economy most severely affected would be the Textile and clothing industry. The textile industry in the US pays average hourly wages (in dollars) of $10.08 versus $0.88 in China according the US annual Survey of Manufacturers and China Statistical Yearbook.

Yin and Yang just like the US and China can be seen as a process of transformation, which describes the changes between the phases of a cycle. What to do? The Chinese symbol for Chaos is a combination of the symbol for risk and opportunity. The bottom line impact on a lower valued dollar and higher valued Yuan is negative for the bond market and mixed for the stock market due to the combination of potentially higher interest rates and a better competitive advantage in exports for US companies. Alternative fuels, heavy manufacturing equipment, and technology will see increasing demand. China will have to be more productive and less dependent upon exports to continue the high level of growth achieved in the past.

Last but not least will there be a stock market bubble in Chinese companies comparable to the NASDAQ meltdown in recent years with Chinese stocks like BIDU (Baidu.com) a company that operates an Internet search engine and offers algorithmic search, enterprise search, pay for performance and news, MP3, and image searches? After an IPO on 8/4/05 ADR's (American Depositary Receipts)offered at $27 per share the stock increased five-fold to $153.98 on 8/8/05 , closing that day at $122.54 and is currently trading at $82.48 on 8/18/05. No earnings, no dividends, a pre-tax margin of only 11.26% but a gross margin according to Bloomberg of over 70%. So fasten your seatbelts, it's going to be a bumpy ride.

Meri Anne Beck-Woods is Chairman and CFO of Odyssey Advisors LLC, an independent investment advisory firm specializing in equity and fixed income management for individuals, entrepreneurs, families, endowments, and non-profit institutions. She can be contacted at mabwoods@odysseyadvisors.com.

Information has been obtained from sources believed to be reliable however Odyssey Advisors LLC does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.

Real Estate Party Policy:

By Natalie Pace, founder NataliePace.com

Tempted to Crash the Real Estate Party? 5 Tips to Make Sure You Drive Home SafelyÉ

Natalie Pace

You can't pass a newspaper, attend an event, talk to your neighbor or grab coffee at the water cooler without hearing of someone wanting to buy real estate. Or how much someone has made in real estate. At the same time, I haven't heard the word bubble tossed around by pundits so much since 2000. Speaking on CNBC, Paul McCulley, PIMCO's portfolio manager, said plainly, ""Mr. Greenspan recognizes that he has a bubble in the property market... The level of interest rates is what he's after now.  He wants the 10-year yield to go up."  

So, what do you believe and how can you pass up the opportunity to put no money down, borrow at 40-year lows and have enough money left over to pay off your credit cards? Like your parents warned you when you were a teenager, "Just because you CAN do it doesn't mean that you should do it." Just because lending policies are so loose these days that all you need is a beating heart, doesn't mean that you should be signing on the bottom line. If you can't afford to pay more tomorrow, and are hoping that real estate will continue to rise so that you can sell for a profit in a few years, you might end up losing something you never really could afford. BANK ON your real estate costing you more in the coming yearÑthrough higher mortgage payments and higher property tax bills-- especially if you don't have a fixed rate loan.

The tips below are designed to help you make a decision that will pay off over the long run, regardless of which direction real estate goes in.

Don't forget that real estate does have significant regional influences. The unfortunate victims in New Orleans and the surrounding areas are painfully aware of that fact this week. Unlike stocks, which can lose their total value (in the event of bankruptcy) but no more, with real estate you could be liable to repay a loan, even if you no longer have a home.

5 Real Estate Party Tips
1. Don't Drink the Punch. It'll only give you a hangover. Everyone else is going to swarm around the punch because it looks beautiful, tastes sweet and frankly because everyone is swarming around the punch bowl. In actuality, the punch is watered down liquor designed to serve a lot of people, not a quality drink designed to delight the elite.

When you see a swarm of people, you want to be the one serving the punch (and drinking the pure, better label champagne on the side). If you're selling the punch, then you are now a successful businessperson. If you are buying the punch, outbidding or outmaneuvering the person next to you to be first in line, you are still buying watered down alcohol, and likely paying more than you would for the premium brand without the frozen juice added.

What does this have to do with real estate? You're hearing that interest rates are going up, that land values are very high and that inflation may be increasing. After the 1989 Japanese housing bubble, which was just as feverish as real estate in the U.S. is today, housing prices tanked for 13 straight years. The Asian Stock Market Crash of 1997 brought about a crash in real estate, largely because the fastest growing economies (like Thailand) were borrowing foreign money and guaranteeing that money with real estate assets that were overbuilt. Not so different from the US today, when so much of our T-bills are held by the Chinese, personal savings are at an all-time low (1%) and banks are lending above the value of the property to people with less than great credit histories.

Don't drink the hype. If you think you have to buy real estate right now, be sober about it. Buy something that you can afford. Opt for a down payment that will allow you to lock in your fixed rate. Make sure that owning the property makes sense for the long term, seven or more years.

2. Designate a Driver Before You Start Drinking. Don't expect the host to get you home safely. S/he's going to be too busy caring for all of the guests at the party.

Who is your best designated driver in today's economy? A talented, experienced financial advisor with no DUIs on her record. How do you find one or make sure that the one you have is sober and responsible? Read "Brokers and Lovers: It Pays To Pick a Good One" for tips, and check with the NASD to see if s/he has had any complaints in the past.

Don't rely on the real estate or mortgage broker to be the most sober professional in the room. The real estate party has been going on for years, and they have to be a little high by now. Additionally, broker means salesperson, and these professionals are paid on commission. They tend to you and then have to move on to serve the other guests at the party.

3. Boot the Kids. The last thing you need at your party is a bunch of inebriated teenagers trying to drown one another in the pool and vomiting on the tapestry. I cannot tell you how many horror stories I've heard of someone turning over her portfolio to a golf buddy, or a nephew or a spouse who recently got his/her broker license or a degree in economics. The reasoning, I guess, is to be nice to family, show support for your spouse and/or get closer to your golf buddy. Don't use your retirement plan to be nice. That goes completely out the window the minute they lose your first dollar any way.

Go with experience instead. As your nest egg grows, you can begin moving up the money food chain. If you've got less than $100,000, you might be stuck talking with your human resources person and getting information on your own (through NataliePace.com, Forbes, Fortune, Money, Investor's Business Daily, etc.). If you have more than $100,000 in your nest egg, interview money managers, who will actively manage your portfolio for you. Odyssey Advisors, Investment Quality Trends and David Fried of the Buyback Letter are all money managers.

Instead of inviting a teenager to the gala, invite a celebrity and everyone has a great time. (See below for how to get a celebrity to attend to your finances.)

4. Invite Celebrities! Celebrity sightings are fun for everyone and make for great party conversation. So, there's the fun of it. On the other hand, however, many celebrities are really good at their craft. I've seen Jennifer Aniston and Michele Pfeiffer without makeup on, and, well, they are simply a whole lot more beautiful than most of us. Henry Kissinger is a lot smarter than most of us. Robert De Niro and Meryl Streep are two of the best actors of their generation.

Likewise, there are celebrities in the financial world, and you can invite them to your party for less than you might think. NataliePace.com's contributing writers are at the top of their game. (Kelley Wright has the #1 risk-adjusted returns over the last 5 years. Steve Dietrich lectures at the prestigious UCLA Anderson School.) For the price of a tank of gas, you can travel all year on great information at NataliePace.com, and we are not the only publication out there. Find the one that suits your style best. Try NataliePace.com, Forbes, Money, MoneyCentral.msn, IQTrends.com, BuybackLetter.com, Investor's Business DailyÉ Get a celebrity to advise you on the economy and where to put your money and watch what a great time you have!

5. More Beauties Than Beasts. This might not have any correlation at all, but if you give me a moment, I think we'll find one. Simply, it's better to have more beautiful women in the room. Why? One hot guy can entertain a trio of beauties, whereas if all the guys are crowded around one girl you're asking for a shootout.

Maybe the lesson here is diversification. Are you investing everything in real estate? Does your nest egg have only mutual funds in it? That's never a good idea. Sure you can make a case for an all girl pajama party or an all guy bachelor party, but those are off-the record events that have the potential of getting too wild and blowing up in your face. Let's just pretend they never happened.

So diversify. There are a lot of beasts out there in the economy today - terrorism, rising interest rates, rising inflation, high land values, high stock markets, high P/Es, high debt, rising tension, rising pension plans, rising oil prices. The only way to make this party any fun is to start adding the beauty now.

How do you add beauty to your portfolio? Index funds are more beautiful than mutual funds. Money markets are more beautiful than bonds. Fixed rates are more beautiful than variable rates. Cash is more beautiful than credit. Get liquid NOW before you need to, and don't take equity out of your home and stick it blindly in the stock or bond market.

Investment Quality Trends link:

www.IQTrends.com

Buyback Letter link:

www.BuybackLetter.com

Is it Marketing or Selling?

By Chellie Campbell.

You need to make sales that create income, or you won't be in business for long. Here's How.

Chellie Campbell

When you're working from home, running your own small business, it is vital to understand the difference between marketing and selling. I found this out when I hired a woman to help me make sales in my workshop business. She was bright, fun, and energetic and I was very optimistic about her being able to enroll additional people for my Financial Stress Reduction Workshops. But I soon found out that although she was happily marketing me wherever she went, she was not making any sales. She was attending networking meetings and telling everyone what a great workshop I had, encouraging people to call me. She thought up great ideas for promotional giveaways, advertising displays, attendance at conventions. But those things cost me money. They didn't make me money.

After a couple of months, I asked her how many prospects she had that might enroll. She said she had talked to lots of people. "How many people have said, ÔYes, I'm coming on this date,' and paid the money?" I asked. "Well, no one has done that," she replied. Then I asked her to make out a list of how many follow-up calls she was going to make to all those prospects and ask them to enroll, and how many she expected to say yes. She dug her heels in at that point, and said, "Wait. That's not what I want to do. I don't want to have a quota!" I explained that in order to pay her, she had to make me some money by closing some sales. After some discussion, we agreed that we saw the nature of the job differently, and agreed to part ways.

After that experience, I made a checklist to make sure I was always conscious of what was "Marketing" and what was "Selling". Whether you are doing the sales yourself, or have someone assisting you to do it, you need to make sales that create income, or you won't be in business for long. Here is my checklist:

Some people think that attending networking meetings, putting an ad in a newspaper or directory, or hanging out a business sign is enough, that you can then just sit back and wait for people to call you. But even interested parties need to be motivated to take action. Call them and ask a lot of questionsÑfind out what they need and if you can help them with that. When you show them that your product or service can help them alleviate their pain or give them the pleasure they're looking for, they will be happy to hire you, and all your clients will praise you and pay you.

As Abraham Lincoln said, "Things may come to those who wait, but only the things left by those who hustle."

Chellie Campbell is the author of "The Wealthy Spirit: Daily Affirmations for Financial Stress Reduction".  She created and teaches the Financial Stress Reduction® Workshops on which her book is based in the Los Angeles area and gives programs throughout the country. Her free e-newsletter is available at www.thewealthyspirit.com. Permission granted for use on NataliePace.com.

Investment Outlook: Investing Gimmicks and the Price of Oil.

By Kelley Wright, Managing Editor, Investment Quality Trends Newsletter.

Dateline Washington, D.C. The D.C. Money Show. August 12, 2005

Kelley Wright, Managing Editor, Investment Quality Trends Newsletterl

The drive into D. C. from Reagan Airport seemed almost familiar because I've seen so many of the landmarks in the movies and news stories that were filmed here. Nonetheless, my first glimpse of the Washington Monument and the dome of the Capitol up close did elicit an emotional response, which quite frankly surprised me considering how much I've railed against some of our government institutions. I realized then that the institutions are not the country or its people; we the people are the country and as for this person, I'm proud to be an American.

***

The Wardman Park Marriott is in a picturesque setting, surrounded by beautiful trees and traditional architecture; very east coast. When you walk inside your feet sink into the plush, forest green carpet and you immediately notice the cherry furniture and hard wood wainscot; very tony and upscale, nothing like the glare and glitz of Las Vegas (where the last Money Show was held). "Wow," I thought to myself, "We aren't in Kansas anymore, Toto."

Crossing the mezzanine floor to the escalator down to the convention area I was wondering if the layout would be different from the Las Vegas Money Show, and then I saw a familiar display from an investor "services" company that I know had to cost about $25,000. This display has the black and white pictures of about a half-dozen "gurus," that were professionally posed and used stage lighting, very high-tech.

I remember a conversation I had with one of the principals of this company about the possibility of IQ Trends becoming one of the "partners" of the service. At the end of the day I decided we weren't a good fit because our Service is the star and it isn't about me as a personality. This company felt different because for them it's all about the personalities, which would explain why none of those newsletters show up as top performers, except for one who does well during bull rallies.

To the right of the convention area doors was the display from one of the daily financial newspapers with all their familiar advertising and handouts, encouraging attendees to come to their free seminar on how to profit using their system. This is where Show attendees get the big white bags, in which they put all the freebies they get from the various exhibitors booths.

Then you cross the last few feet of floor to the main entrance of the exhibit floor and then it hits you.

"Welcome back my friends to the show that never ends. We're so glad you could attend come inside, come inside." - Emerson, Lake and Palmer

What one sees is row after row of exhibitors hawking everything from astrological stock picking systems to opportunities to franchise high-tech water softeners. Like ants in a maze the attendees scurry up and down the aisles picking up their info sheets, listening to sales pitches and grabbing Hershey kisses from the candy bowls.

Oh yes, the greatest collections of investment ideas in the country in one place. Oi vay!

***

We (IQ Trends) are never going to win any beauty contest. Our criteria are so strict, our standards are so high, our universe is small and our approach requires patience and discipline. Heaven help us, how boring.

Which leads us to the question of what do you want from investing? Do you want to be entertained, go on a rollercoaster ride or make money? Some folks actually do want to lose money because they have some psychological issues they are trying to work out from their childhood and losing money in the markets helps facilitate that process.

At the end of the day everybody gets what they want from the markets. For us we just want to protect our principal, earn a return on investment and grow our capital over time. Nothing flashy, very blue collar; just American, thank you.

***

Wow, I guess oil prices do matter after all. $67 per barrel is nothing to sneeze at, but I don't think that's the high. No, the high has yet to be hit and it will be a while, probably months and maybe even years.

Oh sure, there will be sell offs and the price will dip back into the low $50's and the pundits will claim it all over and done with, but don't buy into it. I know. I wish the Select Blue Chips that are benefiting from all this were in the buying area but they aren't, so trust the system.

I know subscribers are frustrated with so few new opportunities. Trust me; you don't know frustration until you have to find something new and interesting to write about every fifteen days!

I thought we were going to get a break in the logjam with interest rates moving up and it looked like the utilities and REIT's were starting to roll over. For sure there were some minor corrections but then the bonds started to rally again. Remember I called for a move to about 4.35% on the 10 year Treasury? Well it went all the way to 4.40% just to show who is in charge and then started to decline. A check of yields shows the 10-year closed at 4.23%.

I thought yields would languish up there a little longer and maybe they will go back. If so those yields might start to compete with the after tax return on some dividends and start looking pretty good. Then some folks might start cutting losses with some positions and we'll start to see some changes in the categories.

One thing is for sure we can't go indefinitely with the market so overvalued that there are only 16 stocks in the Undervalued category. Something has to break; either price has to come down or dividends will have to rise dramatically, but either way some value has to make its way into the market.

***

I have been working with an old associate, Jim Kropp, who is an expert on REIT's. As a matter of fact he runs a couple of them for the folks at Public Storage. Jim has forgotten more about REIT's than most have collectively known and I have asked Jim to work with us on our system to see if we can't modify it a bit to adjust for the idiosyncrasies of REIT's that differ from the industrials we typically work with. I like REIT's and believe they belong in IQ Trends, they just need to be valued differently and I want to do it correctly. If all goes well look for a new feature that is strictly on REIT's and reports on them in their own category.

Investment Quality Trends (at IQTrends.com) is rated the #1 Top Performing Newsletter for five-year risk-adjusted returns by Hulbert's Financial Digest.  That's no small feat, considering the Wilshire 5000 has posted negative annualized returns of -1.4% for the past five years, while Investment Quality Trends has booked an impressive, annualized 16.6% gain. If you are interested in accessing Mr. Wright's newsletter and to post those kinds of gains yourself, go to www.IQTrends.com. 

Where is the Value?

By Kelley Wright, Managing Editor, Investment Quality Trends Newsletter

In this issue we submit the third and final segment of our feature on broad market segments. For those who missed the First-August issue there are nine broad industry sectors that contain thirty-one industry categories that further consist of two hundred fifteen industry groups.

In the previous issue we found that of the approximate two thousand five hundred forty three stocks in the Financial, Healthcare and Industrial Goods sectors only seven stocks, Citigroup (NYSE: C), Old National Bancorp (NYSE: ONB), Washington Mutual (NYSE: WM), Arthur J. Gallagher & Co. (NYSE: AJG), American International Group (NYSE: AIG), Merck (NYSE: MRK) and Masco Corp. (NYSE: MAS) are at their historic area of Undervalue.

In this issue we explore the Services, Technology and Utilities sectors. The first industry category in the Services sector is Diversified Services, which contains ten industry groups. Of the three hundred six stocks that fall within these groups none are undervalued. The next industry category is Leisure, which contains seven industry groups. In these groups are one hundred thirty eight stocks of which two are undervalued; Bob Evans Farms (NASDAQ: BOBE) and Mc Donalds (NYSE: MCD). The next industry category is Media under which are ten industry groups. In these groups are one hundred forty four stocks of which none are undervalued. The next industry category is Retail. Within Retail there are ten industry groups. In these ten groups there are one hundred forty seven stocks of which three are undervalued; Claire's Stores (CLE), Wal-Mart (WMT), and Home Depot (HD). The next industry category is Specialty Retail in which there are six industry groups. Within these groups are seventy-two stocks of which none are undervalued. Next is Transportation, which consists of seven industry groups that hold one hundred thirty three stocks, none of which are undervalued. The final industry category in this sector is Wholesale, which consists of ten industry groups that hold one hundred fifty two stocks, none of which are undervalued.

The next sector is Technology which has five industry categories; Computer Hardware, Computer Software, Electronics, Internet and Telecommunications. Within the Computer Hardware category there are six industry groups. Within these groups are one hundred six stocks, of which none are undervalued. Computer Software has eight industry groups that contain sixty-six stocks. Of these stocks none are undervalued. Next is Electronics with eight industry groups comprised of three hundred fifty two stocks, none of which is undervalued. As an aside this area is the dot-com graveyard. Next we have the Internet, which consists of three industry groups: Internet Information Providers, Internet Service Providers and Internet Software and Services. From these three groups come one hundred eighty one stocks, none of which is undervalued. The last industry category in Technology is Telecommunications, which holds seven industry groups and two hundred fifty eight stocks, none of which are undervalued.

The final sector in this feature is the Utilities sector which consists of one industry category: Utilities, and five industry groups: Diversified, Electric, Foreign, Gas and Water Utilities. Within these five groups are one hundred forty one stocks of which none are currently undervalued. There are two stocks in Rising Trends, Atmos Energy (ATO) and Pinnacle West (PNW) that have relatively low downside risks, however, I suspect those yields will probably move closer to undervalue before too long.

To summarize the three sectors reviewed today we have looked at two thousand, one hundred