What Four Brilliant Economists and One Idiot Guru Forgot to Tell You about the Markets

Today's comment is by David Newman, our long-time Membership Director, and now Market Analyst for The Sovereign Society. 

You remember that old joke. "If you put four economists in a room together you'll get five opinions?" Well today, it's even worse then that.

I have CNBC on right now and I'm watching one of their many "eyes on the market" shows. They've got four economists on right now, and actually I'm not hearing five opinions...I just heard six.

Two were bullish, two were bearish, and two were firmly sitting on the fence somewhere in the middle. Go figure. They're covering their bases.

Let's see...It seems "the Fed will raise interest rates at its next meeting unless they lower interest rates." Great - that helps. I guess they can always look back a few months from now and tell you how right they were.

Does anybody really know? I don't think so.

"That's a Great Question" (That I Have No Intention of Answering)

Last week I was out of town at a financial investment conference. Incredible location...Beautiful hotel, lots of investment gurus with some interesting insights.

But of all the gurus at this conference, one in particular stuck in my mind. He gave an hour-long speech that had a great title which I can't quite remember. But the gist was: "Buy beaten down stocks in beaten down sectors."

Okay, we were off to a good start...

For the whole hour, the stock guru went on and on about individual stocks. He said things like: "This sector is 75% from its highs. How can you lose?" He explained why all these stocks were once great companies with stock prices four times higher than they are today. He showed great charts, great graphs, and even a video (although I'm not sure how it related to the overall presentation).

And so he concluded. "Buy these stocks, hold them and you can't lose." Applause.
Uh...excuse me?

I was still considering his broken logic when someone in the audience raised their hand and asked: "So how are they going to make any money?"

Good question. You're going to love his answer. He smiled and said: "That's a great question!"

(Silence...)

That was it. "That's a great question" — nothing more.

Oh come on, did he really think he could get away with that? Did he think we are really that stupid? I guess he did.

How You Really Make Money in the Markets — Gurus Excluded

Well I don't know about you but I've had enough of investing because some guru "said so" — without any proof whatsoever.

After all, we're surrounded by market noise as it is. We already have four CNBC economists giving six different opinions on any given day. And we spend so much time looking for the next great investment idea we forget to look at the source.

We grab penny stocks because they're cheep. We play insider's tips because well... they're insider's tips. Futures, sure I'm in. Options, now I know people are making really big money there. Got to have money in international markets...I heard China's hot, and Brazil is really cooking. That's nothing compared to the potential in emerging markets, alternative energy and oil.

That's not the way to invest. Take a moment and breathe.

Is there money to be made in the financial markets? You bet there is. But look to the source. Where are you getting your advice? What's their experience — not what's on their resume but their actual experience?

The Difference Between the Investment and the Idea

One of the greatest pieces of investment advice I've ever heard was from my good friend and Sovereign Society Investment Director, Eric Roseman. Eric had just finished giving a presentation at an investment conference and was taking questions from the audience.

Novice investors were asking him about this investment and that investment and finally Eric stopped, looked out toward the crowd, and said: "Always remember... there is a huge difference between a good investment idea and a good investment."

That's one of the smartest things I've ever heard an analyst say. Every single time I'm sizing up a new investment, I think back on Eric's words.

Recently, I've discovered a new investment class that offers a 100% guarantee on your investment and ensures you profit whether that sector goes up or down. (In other words, you're never left wondering, "how am I going to make any money off this?")

I'll tell you more about this new breed of investments in the next few weeks. So please keep an eye out and keep some cash on the sidelines because I think this may be something you'll really want to buy in the months and years to come.

DAVID NEWMAN, Market Analyst

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An Exercise in Patience — Why Japan Is STILL Worth It!

Over the last several years, investing in Japan has been a difficult exercise in patience.

Despite offering some of the best stock market values in the world accompanied by a cheap currency, Japanese stocks have posted some of the worst returns. But at some point, I believe patient investors will make a small fortune in this country, especially speculating on volatile small-cap stocks.

Historically, big bear markets for Japanese smaller companies have eventually rewarded contrarians with big triple-digit gains of 100% or more once the selling ended. I'm expecting this to happen over the next 12-24 months.

Another reason to be patient with Japan is the country's growing role as a distressed investor.

Japan, like most Asian countries, did not suffer significant sub-prime losses. Japanese banks have largely been conservative players on the world stage since crippling deflation in the early 1990s wiped-out a good chunk of shareholders' equity. Many banks have emerged largely unscathed from the ongoing global credit crunch and banks are armed with pools of cash collected from Japanese savers.

On Friday, Sumitomo Mitsui Financial Group (SMFJY) agreed to inject US$925 million dollars into distressed British bank, Barclays plc (NYSE-BCS). Though the amount is small relative to Sovereign Wealth Funds, it's still part of a growing trend in Japan as banks expand their roles and accumulate distressed assets in Europe and the United States.

This marks a significant contrast to the 1980s. At the time, Japanese institutions loaded up on expensive California and New York real estate only to get burned when that "bubble" ended in 1989-1990.

Japan is one big contrarian value play. The market is extremely attractive from almost every valuations matrix and will lead major economy markets again in stock market performance. I just can't say when.

I'm making yet another trip to Tokyo later in September to learn more about this great country and the huge values in equity markets. Stay tuned!

ERIC ROSEMAN, Investment Director

P.S. I can't predict exactly when Japanese stocks will soar, but I can tell you WHAT will take off in the months and years to come: A combination of the Japanese yen and small-caps. That's why I've recommended our Sovereign Society members load up on specific long-term Japanese small-cap and yen plays in our monthly newsletter, The Sovereign Individual. In this month's issue, I flagged several buys in this mouth-watering sector. See page 14 of the July issue for details. Not a member yet? Click here to get the biggest value we offer our readers: a 12-month glimpse into all our best ideas for our lowest rate yet.

In With a New Law, Out with the Fourth Amendment!

The Fourth Amendment to the U.S. Constitution reads:

"The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized."

Compare that with the recent "compromise" legislation that will allow warrantless surveillance of Americans' electronic communications that Congress is set to approve. The bill amending the Foreign Intelligence Surveillance Act (FISA) gives the U.S. National Security Agency — the world's largest intelligence agency — carte blanche to engage in wholesale "data mining" of email communications, telephone calls, faxes, etc. And there's absolutely no requirement that the government describe "the place to be searched, and the persons or things to be seized."

Instead, the NSA's "Terrorist Surveillance Program" (TSP) appears to rely on mining the data streams of U.S. telecommunications companies to analyze transactional records of telephone and email traffic. Supposedly, they're searching for patterns that might point to terrorist suspects. In other words, are you — or anyone else in the United States — acting in a way that merits eavesdropping?

If you match one of these profiles, the NSA apparently assigns a human analyst to listen in on your telephone calls and read your email. Again, there's no warrant required. This apparently happens tens of thousands of times annually. Most of the time, the NSA doesn't find anything suspicious.

What about a warrant backed by probable cause? Apparently, only in those 10 or so cases that merit a full investigation does the FBI obtain a search warrant or domestic wiretap warrant.

Under the new FISA law, the only role the courts play is to approve the computer algorithms the NSA uses to decide which messages merit further investigation. That decision is in the hands of the secret court set up 30 years ago to oversee wiretaps in national security investigations. In its 30-year history, this "Foreign Intelligence Surveillance Court" has turned down only a handful of NSA surveillance requests. But now, its role is just to rubber-stamp whatever algorithm an NSA technician decides to use.

The remainder of the law is a joke, although I'm not laughing. For full details, see my blog right now.

The bottom line: The FISA amendments shift the decisions about which U.S. citizens to spy on from the courts to virtual priesthood of NSA technicians operating in secret and creating surveillance algorithms that only they understand.

It's hardly an oversight to state that this type of wholesale surveillance makes the Fourth Amendment a quaint anachronism.

So, so long Fourth Amendment. It was nice to have you while you were here.

MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com

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