March 2008 Issue

Dropping Turkeys…

Play ball! Let’s quickly focus on the Electoral College math. It takes 270 out of 538 Electoral College votes to become president. In the last four elections, the GOP won all four elections in 16 states for a total of 135 Electoral College votes. The Democrats won all four times in 19 states (including D.C.), tying up a monster 248 ECVs. Darn scary if you are on the GOP train. The Democrats must capture only 22 ECVs from the remaining 16 in-play states to win the presidential brass ring. From the 16 in-play states (states that split ECVs over the last four elections), the ones that count the most are Florida (27 ECVs), Ohio (20), Georgia (15), Tennessee (11), Missouri (11), and Arizona (10). If recent presidential election math runs true to course during the 2008 election and the GOP and the Democrats snare the normal 135 and 248 ECVs, respectively, from the in-the-bag states, the Democrats need only Florida to move into the White House. The Democrats last won Florida in 1996. But even if they lose Florida, the Democrats could take the White House by instead grabbing Ohio and any one of the other states on my short list above. Some nasty math for the GOP.

Now let’s look at some nasty world conditions.

1. Iran’s crackpot leader Ahmadinejad now tells the West to accept Israel’s imminent collapse.
2. Regarding China, political economist Laurence Brahm writes in South China Morning Post, "The soaring prices of goods have only been exceeded by those of assets…Urban residents have shifted their money from banks to speculate either in property or in the stock market… Surplus liquidity continues against a backdrop of dizzying monetary control measures… China’s securities markets have peaked and are ready for turbulence." Look out below.
3. Russia recently secured two major pipeline deals, setting up Europe for energy blackmail. There is no question that Russia is gaining a strategic European foothold and will use energy as a political tool.
4. In Afghanistan, the Taliban has become re-energized with great force. The recent hotel bombing in Kabul signals a new Taliban reality, with conditions continuing to deteriorate by the day.
5. In Pakistan, al-Qaeda forces are gaining strength and linking up with the Taliban and other Islamic extremists. The clear end goal is to destabilize nuclear Pakistan. It is estimated that more than 40% of Pakistanis support al-Qaeda and radical Islam.

Congressional Panic

Here at home, Congress has panicked, not surprising in a presidential election year. Congress’s economic stimulus plan smacks of dropping turkeys out of the sky at Thanksgiving. What we have is a true rollout of Robin Hood economics. As The Wall Street Journal tells readers regarding the Bush/Congress plan, "The problem is his reliance on ‘temporary’ Keynesian nostrums that won’t increase incentives to invest and take risk." I liken the distraction to a similar folly summarized recently by Anastasia O’Grady in the WSJ. O’Grady opines that in Brazil, old-fashioned caudillos cling to power by distributing patronage. As O’Grady notes, "A more fundamental problem is that the Brazilian left still doesn’t grasp the concept that lower rates and a less-convoluted tax code would raise the incentive to work and comply, and therefore would be likely to produce higher government revenues."

So, given the preceding, how does the run to the White House shape up? I can’t put my finger on exactly what Mitt Romney did to turn off so many voters and high-level endorsers. I rated Mr. Romney as the best manager (economic or otherwise). As to the next commander in chief, from day one how about Mrs. Clinton? Let’s cut the crap. And what about Mr. Obama? With the Clintons tag-teaming him with the racial stuff, Barrack faced an uphill fight. With that said, the one-term Senator clearly offers zero credentials as commander in chief. Mr. McCain, on the other hand, has the best credentials for commander in chief. And both Rudy Giuliani and Steve Forbes have endorsed Senator McCain—a powerhouse one-two punch.

Stay the Course

Dividends, income and compounding are key in my core investment strategy for us both. Young Research’s Retirement Compounders portfolio today yields 4%.

Since inception, its compound growth rate has been 18.5% (unaudited). The key here is dividends.

My pie chart, labeled Peace Sign Investing, gives you a handy back-of-the-matchbook retirement guide (today and tomorrow) with 50% fixed, 45% equities, and 5% gold. As I write, my three-proxy portfolio of Dow Diamonds Trust (DIA), streetTRACKS Gold Shares (GLD), and Vanguard GNMA (VFIIX) is down just 2.3% YTD versus, for example, a negative 9.3% for the S&P 500.

Relative PPP

My international investment strategy for you is centered on the melding of long-term currency values and secular big-picture themes. With the exception of a few special-case mutual funds—Third Avenue International Value (TAVIX) is both an example and my mutual fund pick of the year—I favor individual country selection for international investment. For the astute investor, a country-focused approach offers the opportunity to profit from currency fluctuations, dividend yield, and capital appreciation. International investment without considering all three components is incomplete, at best.

My preference for estimating long-term currency values is relative purchasing-power parity (PPP). Young Research developed an arsenal of relative PPP charts to estimate long-term currency values. Although relative PPP valuation is a poor indicator of short-term currency fluctuations, it is a long-term standout. The long-term signals that relative PPP valuation provides nicely complement a long-term equity strategy.

So, to make serious money on the international scene, you want to find all undervalued currencies and all attractive equity markets and lay one over the other. The countries with the most undervalued currency and most attractive equity markets are a nice starting point for further study.

Singapore #1

When I go through this exercise today, Singapore comes out on top. My Singapore Dollar Valuation chart shows that the Singapore dollar trades at discount to fair value. The Singapore dollar will also benefit as China picks up the pace of yuan appreciation to prevent the Chinese economy from overheating. Singapore and China are competitors in certain export markets. Yuan appreciation allows the Singapore dollar to appreciate without sacrificing market share in Singapore’s export industries.

Profound Promise

The economic picture in Singapore offers the patient investor much promise. Singapore is transforming itself into a world-class knowledge-based economy. Biomedical research and private banking are at the forefront of the country’s march up the value chain. Output of drugs and medical devices is up fourfold since 2000. Over the past two years, medical travelers are up 28% to 410,000. And more than 100 foreign drug makers and biomedical companies have set up factories in Singapore. These firms are likely attracted to the city-state’s strict patent enforcement, highly educated workforce, and friendly business climate.

Stricter than Swiss Law

On the financial services side, Singapore is fast becoming Asia’s offshore financial center. Assets under management in the country’s private banking industry are growing at rates of up to 30%. In a recent Barron’s article, Justin Ong, a partner at PricewaterhouseCoopers, notes that China is creating 30,000 new millionaires every year, with India, Indonesia, and Taiwan not far behind. This newly minted group of millionaires is attracted to Singapore’s low rate of corruption, rigorous legal system, and secrecy laws that are now considered stricter than even Swiss laws. Continue to add to your iShares MSCI Singapore (EWS) position on weakness.

The Overvalued Euro

At the other end of the spectrum for international investment are countries that make up the European Union (EU). The big negatives for the euro-area are: 1) an overvalued currency and 2) a currency based on an untested monetary experiment that is likely doomed in the long run. The euro is simply a bad idea. You cannot successfully set monetary policy for a group of independent countries with varying degrees of economic growth. What may be accommodative monetary policy for one country can stifle growth in another. Sure, different regions of the U.S. grow at different rates and the Federal Reserve sets monetary policy for the entire country, but the difference is that if one region of the U.S. is in economic recession, citizens can simply hop on a bus and head for greener pastures. However, in the euro-area, barriers to migration are more prohibitive. Would-be migrants may have to learn a new language and new customs, and apply for citizenship in a new country. For many Europeans, migration is not a viable option.

The Coming Collapse

A collapse of the EU will likely unfold when the European Central Bank (ECB) monetary policy is accommodative in some member countries but restrictive in others. A populous faced with stagnant economic growth is unlikely to view kindly of monetary policy set to prevent inflation in foreign countries. The federal government will attempt to allay concerns through deficit spending, but such spending done excessively will introduce an entirely new set of problems and threaten the euro’s viability. Without control over monetary policy, cries to leave the EU will grow louder, and any politician interested in job security will fold under the pressure. Continue to avoid the euro and euro-area equity markets. If you own Dodge & Cox International (DODFX) in a tax-deferred account, you may want to consider reducing your position. The fund has meaningful exposure to the euro.

Cheap Ol’ Japan

In between the best and worst areas for international investment are Japan, Switzerland, the Nordics, Malaysia, Australia, and Canada. Japan is simply cheap. The currency is cheap, as is the stock market, and sentiment is negative. The Swiss franc is a safe-haven currency with a small float. The Nordics are a nice way to take advantage of growth in emerging non-euro European countries such as Latvia, Lithuania, and Estonia. My Malaysian Ringgit Valuation chart shows that the ringgit is extremely undervalued and, like the Singapore dollar, ringgit appreciation will follow yuan appreciation. Australia is one of two countries with an overvalued currency that I advise for international investment. The other country is Canada. The Australian dollar and Canadian dollar are both overvalued on a relative PPP basis, but both countries are natural resource powerhouses. Burgeoning demand for natural resources should counterbalance the potential negative effects of a reversion to relative PPP currency values in coming years. If you invested in iShares MSCI Australia (EWA) and Fidelity Canada (FICDX) based on my initial recommendation, you have made big gains. If either position has become too large in your overall portfolio, some trimming may be in order.

No Bottom Yet

The housing picture in the U.S. continues to look ominous. Housing starts are still declining, inventories remain high, and prices show no signs of improving. The good news is that the requirements for stabilization in housing within the next 12 to 24 months are now in place. Housing starts have fallen so much that further declines are limited–the floor is zero, you know! My chart on U.S. housing starts relative to U.S. households shows that, at current rates, housing starts are not keeping pace with household formation. And falling mortgage rates and lower home prices are improving affordability. My housing affordability chart shows that houses are the most affordable that they have been since 2004. Do not look for a return to the heyday in real estate anytime soon, but a flattening in activity and prices is probable in the near term.

Top 10 Common Stock Countdown

(1) St. Joe (NYSE: JOE): Did you buy St. Joe on my recommendation last month? My price chart shows a powerful price breakout for JOE. When combined with a compelling valuation, this type of price action usually indicates that a stock is going places. Young Research values JOE in the mid-$60s. At the height of the real estate boom, St. Joe overshot Young Research & Publishing Inc.’s valuation by a wide margin, and I advised to sell. Now the negative sentiment for anything related to Florida real estate has driven the shares down to bargain levels. Buy.

(2) Cresud (NASDAQ: CRESY): In China, rising incomes are leading to double-digit growth in per-capita meat consumption. Higher demand for meat increases the demand for grains. It takes 20 pounds of grain to produce two pounds of beef. Cresud has both ends of the equation covered. The company raises cattle and produces wheat, corn, soybeans, and sunflowers on over 1.1 million acres of farmland in Argentina. Buy Cresud today at trend.

(3) Xstrata (LONDON: XTA.L): Xstrata recently confirmed that it is in talks to be acquired by Brazilian iron ore giant Companhia Vale do Rio Doce (CVRD) for as much as $100 billion. A combination of the two firms would create the world’s largest thermal coal exporter, the largest iron-ore producer, and a leading copper, zinc, and nickel producer. With the field of big mining companies narrowing sharply, a bidding war for Xstrata is possible. Buy.

(4) Unilever (NYSE: UL): Unilever is simplifying management of its U.S. foods operation by combining food businesses under one organization. The board of Unilever should pay attention here. Unilever has a convoluted and confusing corporate structure with two parent companies—one listed in England, Unilever PLC (UL), and the other listed in the Netherlands, Unilever NV (UN). You have to wonder how much time, effort, and money is wasted on this messy corporate structure. My price chart shows that an attractive buying opportunity has emerged as a result of a mini price correction. Buy—the UL shares!

(5) PepsiCo (NYSE: PEP): PepsiCo is very bullish on Russia. The company’s Frito-Lay division recently announced plans to build a $170-million potato chip factory in Azov, Russia. Since opening its first plant in 2002, Frito-Lay has captured a third of the country’s potato chip market by offering flavors such as crab and white mushroom. On the drink side of the business, PepsiCo has 20% of the Russian soft drink market, and the company’s Lipton tea and Aqua Minerale bottled water products are leaders in their categories. Overall PepsiCo sales in Russia are growing at 30% annually. Buy.

(6) Duke Energy (NYSE: DUK): According to a 2005 infrastructure report by the American Society of Civil Engineers, the U.S. power transmission system is in urgent need of modernization. Growth in electricity demand and investment in new power plants has not been matched by investment in new transmission facilities. Over the coming decade, investment in transmission assets is expected to average $3 billion to $4 billion per year, up from $286 million as recently as 2003. Regulated utilities are poised to benefit from higher capital investment in transmission assets. Utilities earn return on invested capital that is set and guaranteed by state public utility commissions. Higher capital investment results in greater guaranteed income for utilities. With transmission assets in the Carolinas and the Midwest, Duke shareholders should be smiling. Buy.

(7) Plum Creek Timber (NYSE: PCL): Timber companies may soon provide the feedstock to produce ethanol. The energy bill signed by President Bush in 2007 mandates an increase in ethanol production to 36 billion gallons by 2022. After 2015, two-thirds of mandated ethanol production is supposed to come from non-corn sources such as wood or switchgrass. Zeachem, a Menlo Park, California, company thinks that it can produce ethanol that is cheaper and less energy-intensive than corn-based ethanol. The company is designing a small-scale facility expected to begin production in 2009. The recent correction in the price of PCL is an opportunity to aggressively add to your position. Buy.

(8) Federated Investors (NYSE: FII): Are you an enterprising investor who believes that my highly favored Vanguard Wellesley Income (VWINX) is too conservative for you? Then buy Federated Investors. Federated is the enterprising investors’ Vanguard Wellesley Income. Federated earns 49% of its revenues from money-market funds, 40% from equity funds, and 11% from fixed-income assets. Add up the money-market and fixed-income assets, and you get a 60% fixed income/40% equities balance–the same allocation that Vanguard Wellesley Income targets. Coincidence? Maybe. My relative strength chart shows a powerful relative breakout. Buy.

(9) Sysco Corp. (NYSE: SYY): Sysco is North America’s leader in the food services business, with over 390,000 customers—most of them restaurants. Sysco holds 15% of the market share in this highly fragmented business. Its nearest competitor, U.S. Foodservice, holds only a 10% share. Buy.

(10) Royal Dutch Shell (NYSE: RDS.A): There are over 800 billion barrels of recoverable oil in Colorado, Utah, and Wyoming—more than triple the reserves of Saudi Arabia. The oil reserves are locked away in oil shale, a sedimentary rock rich in kerogen, a fossil fuel that is a precursor to oil. If given a few million more years to stew, kerogen would turn into oozing crude oil. A few million years is even beyond my advised investment horizon. But Shell has been active in oil shale research since the 1970s, and the company is on the verge of perfecting a method to convert oil shale into commercial quantities of crude oil. The potential here is mind-boggling. Shell is available today belowtrend. Buy.

What’s Up & What’s Down

Gold is a horrid investment, unless it’s not. And that’s the beauty of gold. Gold at the end of the day is money, despite what politicians and most central bankers will tell you. The number of ounces of gold worldwide increases little annually, while the world’s printing presses continue to grind out mountains of fiat currency. Currencies over history have a bad habit of depreciating. Buying power is lost, and often holders end up with little. It wasn’t until recently that gold’s peak price of 1980 was exceeded. And yet inflation has tripled since 1980. Back in 1980, Young Research’s monetary price for gold (see Chart #25) was about $400/oz. Today it is $7,480/oz. I have been strongly advising gold for a number of years.

Year to date, look what’s down: Apple 33%, Dell 16%, Google 20%, Hewlett-Packard 13%, Intel 22%, and Motorola 29%. And streetTRACKS Gold Shares (GLD) is up by 11% and American Century Global Gold (BGEIX) is up 11.4%. My standing advice continues to call for a 5% gold hedge in a retirement portfolio of 50% investment-grade short- and intermediate-term fixed-income, 45% dividend-paying stocks (or funds in either case), and the above-cited gold.

The growth- and technology-heavy NASDAQ Composite gained more than the Dow and the S&P 500 in 2007 based on the hope that growth and technology stocks are somehow immune to a slowing U.S. economy. But like all strategies based on hope, the stock market quickly corrected this erroneous belief. The NASDAQ is underperforming year-to-date, and Vanguard Growth Index is down 9.4% while the Vanguard Value Index (VIVAX) is down only 5.8% despite a heavy weighting in battered financial stocks. For serious money, the only viable investment strategy is one focused on the power of compound growth and grounded in the logic of a value-oriented approach.

After declining last year, REITs are down again this year and beginning to look attractive. REIT dividend yields are rising, and Treasury yields are falling. I would like to see further improvement in REIT yields before making an aggressive move back into the stocks.

New to the Monster Master List

I am adding Franklin Mutual Series Financial Services—Class Z (TEFAX) to my mutual fund Monster Master List. I will advise on purchases of the fund once signs of a bottom in the credit crunch are clear. You will be able to purchase class Z shares if you own Z shares of another Mutual Series fund. I am also adding BlackRock World Investment Trust (BWC) to my Monster Master List. BWC is a globally focused closed-end fund with an income-oriented investment objective. To generate income, BWC writes covered calls and has the ability to invest up to 25% of the fund’s assets in bonds. BWC currently yields 8.7% and trades at a 1.3% discount to net asset value. I also like BlackRock Dividend Achievers Trust (BDV), which yields 7.4% and trades at an 11% discount to NAV; BlackRock Enhanced Dividend Achievers Trust (BDJ), which yields 10.2% and trades at a 4.25% discount to NAV; and BlackRock Global Opportunities (BOE), which yields 8.9% and trades at a 5.6% discount to NAV. In the case of BlackRock Dividend Achievers Trust, the wide discount from NAV is especially attractive. BDV’s approach to stock selection is very mechanical and lends itself easily to an ETF. With the addition of a few lines to BDV’s prospectus, the discount could narrow overnight. I would like to see BlackRock add a provision to the BDV prospectus that automatically converts the fund into an ETF if BDV trades at a 5% discount to NAV for more than five days. There is no precedent for this yet, but a closed-end fund is currently in registration with a similar conversion feature. Buy BWC, BOE, and BDJ in tax-deferred accounts. BDV can be purchased in taxable and non-taxable accounts.

Rio Tinto

State-owned Aluminum Corporation of China (Chinalco) recently teamed up with Alcoa (NYSE: AA) to buy a $14-billion stake in Rio Tinto (NYSE: RTP). Chinalco and Alcoa said that they did not intend to make an offer for the entire company but reserved the right to do so if another party made a firm bid. A bidding war between China and BHP Billiton (NYSE: BHP) may soon erupt. Stay alert.

Hog Wash

Continue to avoid the stock of my favorite company in the world—Harley-Davidson (NYSE: HOG).

In Harley’s most recent report, CEO Jim Ziemer notes, "Looking ahead, we will continue to manage the company to generate long-term shareholder value while protecting the brand." My chart indicates my last listed sale price for HOG at $73.34. The stock today is $38.51. I am compelled to question what J.Z. has in mind regarding generating shareholder value. As to protecting the brand, Mr. Z has participated in a program of overproduction that has flooded loads of dealers with overstock. In a recent Q&A with analysts, Mr. Z commented that the used motorcycle market is "very strong." Perhaps Mr. Z is referring to the Honda and Yamaha motorcycle markets, because I can assure you that the words "very strong" do not characterize the used-HOG market. HOG reported a 5.3% decline in unit shipments of bikes in 2007. But export shipments were up 17%. Hogs are a whole lot cheaper abroad due to the weak dollar. Here in the U.S., however, unit shipments were down a breathtaking 11%. I’d like to see Harley go private. Meanwhile, patiently wait on the sidelines.

What I’m Buying

I invest only in ideas that I bring to you in these reports, and I tell you what I’m doing. Since I last wrote to you, I have made eight significant buys. Here is my complete personal list: (1) iShares Global Materials Sector Fund (MXI), (2) Fidelity Select Natural Gas (FSNGX), (3) iShares MSCI Hong Kong (EWH), (4) iShares Singapore, (5) iShares MSCI Switzerland (EWL), (6) T. Rowe Price Emerging Europe and Mediterranean (TREMX), (7) T. Rowe Price Japan (PRJPX), and (8) Third Avenue International Value (newly re-opened).

Still No Down Quarter

Regarding the economy, GDP growth was up a preliminary 0.6% in the fourth quarter. No down quarter yet. My two charts show a rebound for Young Research’s Moving the Goods Index, as well as and the Dow Jones Transports versus the Dow Jones Industrials.

Should the rebound persist, recession can be fended off for certain. As long as shop floors remain busy, there will be no recession. The workweek indicator just came in at 41.1 hours. No change from last month. It’s good news. As long as this indicator holds above 40.7 hours, a recession will be avoided. New orders for consumer goods and materials as well as for non-defense capital goods industries so far remain strong enough to fend off recession. Go to my Top 10 Common Stock Countdown for your stocks to buy today. Beyond my Top 10, a coveted cadre of beaten-down blue chips will regain vigorous upside momentum. The list includes American Express (NYSE: AXP), Citigroup (NYSE: C), Federal Express (NYSE: FDX), General Electric (NYSE: GE), HSBC Holdings (NYSE: HBC), and Illinois Tool Works (NYSE: ITW). And I’m patiently waiting to get aggressive with REITs, including ProLogis Trust (NYSE: PLD) and Vornado Realty Trust (NYSE: VNO). The same holds true with Forest City. 2008 is my Big Idea retirement year, and this summer, 79 million Americans will begin the retirement retreat. Florida will be the big winner, thus my logical interest for you in St. Joe (NYSE: JOE), Alico (NYSE: AL), and non-Monster Master List name Bank of Florida. Make it a good month.

Warm regards,

Richard C. Young

P.S. In terms of international commerce, Hong Kong has evolved as the world’s global supply chain headquarters. This is one of the many reasons why I advise iShares Hong Kong for you and for me.

P.P.S. Along with real estate stocks, banking big and small will offer some of the most compelling buys of 2008. From little non-Monster Master List favorites like Center Bancorp and Bank of Florida to Third Avenue Real Estate Value (TAREX), your opportunities are truly endless. You will find a wide swath of great buys in Young Research’s brand-new Distressed Securities & Takeover Candidates. Go to www.youngresearch.com and check in regularly. I have inaugurated a new regular update feature on loads of interesting fare from retirement, real estate, and terrorism to the 2008 presidential race, health and fitness, travel, and, of course, essential music. You’ll benefit from a load of neat stuff–like my recent postings on cholesterol (a real shocker) and Day Jet’s southeastern U.S. air taxi service.

P.P.P.S. You will also find lots to like at www.younginvestments.com keyed to a compelling global perspective. Check it out.

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