The engine behind this bull market are low interest rates driven by economic weakness. Bull markets are born out of recessions and this one is no different than many past bulls.

Despite recent relative strength in home building stocks, the housing market is still depressed as there remains an oversupply of homes as well as an abundant supply of foreclosures. Commodity prices are on the rise again however, core inflation and wage inflation remain weak. The employment picture has not yet improved enough to allow the Fed to normalize rates. Therefore, the proverbial punchbowl remains on the table with additional re-fills likely.

Bottom line: There is little competition for stocks.

The Feds commitment to stimulus is likely to persist throughout 2011. The extension of the Bush tax cuts and the 2% cut in the employee payroll tax rate and a 2-year extension of depreciation incentives for business investment is also a form of stimulus. The above coincides with a favorable election cycle period and a market that is trading at a reasonable multiple when the current interest rate environement in considered.

Certainly, the fundamental tailwinds remain strong. More importantly, our longs continue to work and the market refuses to give up much ground. Therefore, we continue to stick with our plan and add new names as they emerge on a stock-by-stock basis.

The big question is: how far out is the market looking forward and when will it cease discounting the positive side of the coin? The answer: no one knows. This is why regardless of how great all the rhetoric sounds, we adhere to strategy.

To put it in simple terms, all the statistics, analysts opinions and pundit predictions on Wall Street wont change the fact that we sell our stocks when they stop us out and we stop buying stocks when they cease to set-up constructively. In my 30 years as a stock trader, I have learned that this is by far more important than opinions and forcasts, including mine.

Until then, we continue to trade the best SEPA situations as we remain on a buy signal, and the party continues.

Mark Minervini

Most analysts say that pharmaceutical stocks and consumer staples are the best places to put your money during rising rates. But there is one stock that will benefit big time from higher interest that doesn’t fall into either of these sectors. The stock is Apple Inc. (AAPL).

Why Apple? First of all, it has no long-term debt. Second, the company has a huge amount of cash. No wonder why I referred to Apple as a money market fund a few months ago. Although many articles report that it has about $51 billion in cash, that number includes $25.391 billion in what Apple’s accountants consider long-term marketable securities. But Apple does have $11.261 billion in cash and cash equivalent securities plus $14.359 billion in short term marketable securities, for a total of $25.56 billion.

Apple’s weighted average interest rate has been dropping for the last three years, as have rates in general, from 3.44% in 2008, to 1.43% in 2009, to 0.75% for the current year. Of the $25.56 billion in what is essentially cash, total income based on the 0.75% weighted rate is about $191.7 million.

If the rate increased to 3% and assuming the balance remains the same (but it should certainly increase), interest income on effective cash would rise to $766.8 million, and at 5%, the income would be $1.278 billion, or $1.18 in additional earnings per share, currently at $15.15 per share. This additional interest is a pre-tax number, but based on the companys effective tax rate, additional earnings would still be close to a dollar a share.

Plus there are no other expenses incurred in generating this income. No salaries, no capital expenditures of manufacturing equipment, no purchase of raw materials, no office space rental, no nothing; just some electrons on a computer screen. Talk about easy money.

If you want to check out the lists of stocks which have a lot of cash, which can be downloaded, sorted, and updated, go to WallStreetNewsNetwork.com.

Disclosure: Author owns AAPL.

By Stockerblog.com

I dont know about you, but applying for a mortgage can be frustrating and time-consuming. From our perspective, we were just another number applying for a bunch of numbers. Insert a great mortgage broker into the equation.

Heres a short (but not inclusive) list of great things a great mortgage broker can do you:

Give you customer focus – Unlike banking representatives, mortgage brokers are not tied to any one bank. Sure, they might have some favourites, but great brokers canvas the full field. Our guy was looking out for the customer (us), our terms, conditions and pre-payment options. He was working to find a product that fit our needs and situation, not his agenda. In brief, our mortgage situation is not ideal, we have a hefty penalty to pay if we break our existing mortgage and go with another lender within the next two years. (This is a reminder to look at the detailed print of your mortgage agreement before you purchase a new home .) In our case, a great opportunity arose and sometimes you simply cant pass those up regardless what the fine print says – life happens, choices need to be made and chances need to be taken. Back to my point, you can certainly make a strong argument that mortgage brokers work for themselves, not you, however without attention to personal detail, they wouldnt be in business. Our broker put our needs and requirements #1. He was always very responsive. He never said he didnt have time for us or needed to take another call.

Give you leverage The way I see it, using a mortgage broker to fund a mortgage, youre going to get more attention because the lender wants that broker to continue sending business their way. As an individual customer, were just a number apply for a bunch of numbers. In talking with our broker, I know if he sensed any run around from a prospective lender hed move on and our mortgage prospects would go with him.

Save you money No doubt mortgage brokers are compensated by the lenders they strike the deal with but a) that means you dont pay them and b) as long as the rate and conditions of the mortgage are better than what you could have obtained youre saving money. Potentially lots. Like I mentioned earlier, our broker worked hard to get us a good deal. He knew his stuff and actively monitored bond yields for us. We more than appreciated that because without our new great rate and its associated terms, we wouldnt be coming out ahead over our hefty mortgage penalty. Weve taken our lumps and learned from them. My advice? Dont take a five-year mortgage term if theres even a chance you might move within that term period. Sure, you can sometimes port your 5-year fixed term to your new home (it doesnt cost anything but the mortgage appraisal and sometimes a small discharge fee) but that wasnt ideal for us. In hindsight, we should have taken a shorter fixed term a few years back or instead, given historical research, a variable rate. Click here to read more about variable mortgage rates and how more often than not, you come out a winner over a fixed rate mortgage.

In closing, mortgage brokers can be a tremendous resource, if you have the right one. Were glad we worked with our guy. Actually, we still are.  He’s still checking in with us to ensure all the rebates we were able to take advantage of are coming our way, including one for the mortgage appraisal.

I know if I have mortgage question going forward, Ill drop him a line. Hell take my call, hell listen, hell provide good customer service and objective feedback. I dont mind sharing who we used because the experience was very positive.

Thanks very much Rob!!

Click here if you want his contact information.

Do you agree or disagree what a great mortgage broker can do for you?
Any positive or “other” experiences youd like to share?

Cheers,
Financial Cents

Ken Fisher Interview Part 1
Please note: Interview took place on Wednesday, October 27, 2010

Stockerblog: I’d like to first ask you about your new book Debunkery. Why don’t we start out with you giving a description of what debunkery is and how you came up with the name?

Fisher: The name popped into my head. Debunkery is the process of what I talked about in my first question of The Only Three Questions That Count book, which is ‘What Do You Believe that is Actually False’. In Debunkery, the game, if you will, is to take things that are widely accepted and see if you can subject them to some catechism that shows that they are not true. That which is thought of as conventional wisdom is exposed as actually false, and therefore bunk, and therefore the process of debunking or debunkery.

Debunkery is a game that I try to convey in the book by using some techniques that aren’t necessarily terribly complicated, some of which are easier to learn than others but pretty much anyone can learn if they wanted. So part of it is not just showing the 50 things that people often believe that are bunk, but teaching them how to do the debunking themselves so that when they finish reading the book, they can do their own debunking.

Stockerblog: Let’s talk about Bunk #2 which is ‘Well Rested Investors are Better Investors.’ Now I think what you mean by that is the classic conservative type of investments like bonds or bank accounts, that type of thing, is not really the way to go; you really have to go into stocks to get the returns you are really looking for.

Fisher: Well you can view it that way, and that is one way to view it, but you see a lot of people on different web sites saying that you need a sleep-at-night factor, or sell down to the sleeping point; you hear all these things about sleeping and conventional wisdom. Or people say things like, “Well I’ve gotten out of the market and I’m not going to get back in until I’m more comfortable with things,” “I don’t think I could sleep if I owned category X now.” And the fact is, capital markets, in all their aspects, are ones where comfort is a very expensive item.

If you are prone to be comfortable based on what you own, you better reconcile yourself to low or negative returns. Most of the time when people buy the things that are most comfortable, they actually end up getting negative returns. The history of buying comfort is very expensive.

So if you think of any asset class, doesn’t matter whether it is stocks, bonds, commodities, anything, the time people are most comfortable with it is mostly really close to the peak. When people think they have the clearest future, it’s close to the peak. When they think they can’t see a clear future out there at all, that’s more often, close to a bottom.

Stockerblog: I know that some investors feel comfortable with municipal bonds, they are looking at possible increases in capital gains taxes, they are wondering, well if I can get 5% tax free versus nine or ten percent on my stock portfolio, which is going to be taxed at the state and Federal level, maybe that’s what I should be in.

Fisher: One of the things that they don’t think through in the way capital markets work is it’s not about whether you’re rational, and it’s not about whether your smarter or more rational than the guy down the road, the reality is capital markets discount that which everyone has been digesting for some time, and it’s virtually impossible to think that a concept such as the ones you just articulated isn’t exceptionally, widely digested by a very large number of people, who processed it and pressed it into securities at current prices.

So for someone to think, “I can get a better return off of something like that,” whatever it is, it’s very hard for people to get but it’s an arrogant statement. It’s saying my rational observation is somehow unique compared to all the other people confronted with the exact same phenomenon.

That’s one of the hardest concepts that people have is that markets are discounters of all known information. And while markets are not perfectly efficient, they are relatively efficient. So something as simple as taxes, millions of people have forever made decisions based on tax rate changes, and there is actually a very clear and demonstrable history which people don’t want to hear about, which is tax rate changes don’t end up having facts that people would predict because they are priced into the market long before those tax changes ever come to pass.

Stockerblog: I remember that was in one of your bunk chapters.

Fisher: One of the things you hear people say all the time are things like “Stocks will do well or badly, bonds will do well or badly,” you pick a category, it doesn’t matter to me, “because capital gains rates are going up or down, or because income tax rates are going up or down.” They somehow seem to forget that, and this is one of the points I use in Debunkery, is that history is actually very useful for debunking, because we’ve had a lot of times in the past where interest rates have gone up and own, and tax rates have gone up and down, and so if something as simple as that were to have the effect that people think it might, they would see those changes when those simple changes occurred in the past, and that’s easy to demonstrate.

I tell people all the time, stop and go back and check things. And very few people do, because what most people do is they go into simple observation of the way they think it out to work and they don’t go any further than that. This is Bunk #7, which is Go With Your Gut. Your intuitive reaction to things, again everybody else’s reactions which are not that different than yours, unless you think you are really unique which is a really arrogant statement, they are already priced into the market already.

End of Part 1

The Debunkery book is available at Amazon.

Ken Fisher obviously doesn’t give individual stock recommendations in his interviews, but some stocks he likes that were mentioned in his recent Forbes columns are available in the form of a free Excel list at WallStreetNewsNetwork.com.

If you missed last years interview, you can check it out as follows: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6

By Fred Fuld at Stockerblog.com

Disclosure: Interviewer doesn’t own any of the stocks mentioned above at the time the article was written.

Copyright 2010. All rights reserved. Reproduction of this interview prohibited without permission. All opinions are those of Ken Fisher, and do not represent the opinions of Stockerblog.com or the interviewer. Neither Stockerblog nor the interviewer nor the interviewee are rendering tax, legal, or investment advice in this interview. If you want tax, legal, or investment advice, contact the appropriate professional.

However, there is one type of income investment that is gaining favor with income investors, and that is the government guaranteed mortgage real estate investment trusts. These REITs purchase residential mortgage pass-through securities which are guaranteed by government-sponsored entities, and use leverage to increase the yield. An example is Capstead Mortgage Corp. (CMO), which generates a yield of 9.4%.

Capstone is a Dallas, Texas based REIT that has been around since 1985, and has paid quarterly dividends since 1987. The company invests in adjustable-rate mortgage securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by Ginnie Mae, an agency of the federal government. Technically, with the explicit and implicit guarantees of the U. S. Government, the securities in the portfolio have an implied AAA credit rating. Although after what happened to the rating agencies and many of the companies and securities that they rated as triple A, I’m not sure that AAA means as much.

However, that is probably the biggest risk of this type of investment. Will the government entities, and behind them, the US Government, continue to guarantee the timely payment of principal and interest payments on these mortgages (with an emphasis on the word ‘timely’)? Assuming the government does come through, then a major risk of this type of investment is eliminated.

What about the risk of rising interest rates? Remember, when interest rates rise, bonds drop in value. Hopefully, the fact that Capstead invests in adjustable rate mortgages, as opposed to fixed rate mortgages, will help to alleviate that risk. But there is always the risk of a sharp increase in rates causing the REIT to drop somewhat.

Capstead has a current price to earnings ratio of 9 and trades at 7.5 times forward earnings. Although heavily in debt to increase the payout, the company does have $3.82 in cash per share. The price per share is about 7% below the book value of 11.87. The third quarter 2010 earnings conference call will be held October 28, 2010 at 9:00 AM Eastern time.

For more high yield REITs, check out the free list at WallStreetNewsNetwork.com, which can be downloaded, sorted, and added to.

Disclosure: Author does not own the above.

By Stockerblog.com

While dividend-investing takes some considerable time and effort, investing in some ETF products in my opinion, does not. When it comes to our RRSPs and TFSAs, Ill be honest, Im pretty lazy. Thats why we hold iShares products such as XIU, XDV and XBB in these accounts.

First, I like XIU (iShares S&P/TSX 60 Index Fund) because it tracks the performance of the largest, most liquid stocks that trade on the TSX. The MER is a dirt-cheap 0.17%. Thats a huge bonus for starters; buying the biggest and some of the best Mr. Market has to offer very cheaply. XIU also pays some tidy distributions every quarter (over $0.10/unit) which allows us to reinvest those distributions and buy more XIU units over time. Our compounding machine is at work. XIU currently yields about 2.4%. While XIU does not cap any single stock (like XIC does, at 10%), Im pretty comfortable with it. I consider this ETF one the best set it and forget it products you could own.

Second, I like XDV (iShares Dow Jones Canada Select Dividend Index Fund) since it seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the Dow Jones Canada Dividend Index. This index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index according to indicators such as dividend growth, yield and average payout ratio. The weight of any one stock in XDV is limited to 10%. While Im slowly working on owning most of the XDV holdings directly, in my unregistered accounts, I can enjoy the benefits of having all 30 pre-wrapped in this ETF. This ETF used to pay distributions quarterly, but now they pay monthly. The October distribution for XDV is about $0.09/unit, providing a tidy yield of about 5%. One downside to this product, its heavy in financials. When Mr. Market is happy, Canadian banks and life insurance companies are making money, investors are rewarded. When the financial sector isnt booming, things arent so rosy, so you need to comfortable with XDV ebbs and flows. If the swings are too much for you, CDZ (Claymore S&P/TSX Canadian Dividend ETF) is a similar product that should be considered. CDZ is a little more diversified. Market swings are inevitable so I dont mind the back and forth, especially because XDV has an investor-friendly MER of 0.50% (lower than CDZ).

Lastly, I like XBB (iShares DEX Universe Bond Index Fund) because it provides us with fixed-income security. Ive often read and heard everyone should own some bonds and I dont disagree. How much in bonds though, is a personal choice. Im fond of this simple rule of thumb: % in bonds corresponding to your age. Were in our mid-30s so our RRSPs and TFSAs are about 30% bonds. Our ownership in XBB will surely increase in age, not because people said so but because it makes sense to us to protect capital weve worked hard to accummulate as we move closer to retirement. Besides, we still have unregistered accounts with dividend-payers so theres no point in making our investments more risky than need be. XBB tracks the performance of the DEX Universe Bond Index, less expenses, and does a pretty fine job of that. XBB consists of Government of Canada, provincial, corporate and municipal bonds issued in Canada. Its really an excellent all-in-one bond solution. The weighted average duration of XBB holdings is just over 6 years, which is not bad if (when) interest rates rise. XBB also pays monthly distributions, enough for us to buy more units every month. The MER is only 0.30%, almost as low as you can get for any bond ETF in Canada. While other ETF products are less volatile than XBB, such as XSB (iShares DEX Short Term Bond Index Fund) or CLF (Claymores 1-5 Year Laddered Government Bond Index Fund) I dont mind the excess risk XBB takes on in comparison. It is after all tracking the DEX Universe Bond Index, which is not very risky, and it has rewarded investors to the tune of about 6% since inception.

Im proud of our effortless ETFs for many reasons but above all, we dont have to work hard to understand or manage any of them.

How about you?
Do you own any effortless ETFs in your portfolio?

Cheers,
Financial Cents

Many of these CEFs have yields of 5% or more, such as the Blackrock Apex Municipal Fund Inc. (APX), which sells at a discount to net asset value, uses almost no leverage, and yields 5.7%. The Nuveen New York Dividend Advantage Municipal Fund 2 (NXK) has a yield of 5.8%, is currently trading at a discount to NAV, and has about 26.5% leverage, much lower than the average leverage of 34.7% for all the CEFs. The Nuveen Investment Quality Municipal Fund Inc. (NQM) yields 6.6%, utilizes about 29% leverage, and trades at a slight discount. WallStreetNewsNetwork.com just updated its list of tax free income closed end funds, which describes almost 200 ETFs,, including yields, discounts/premiums, leverage, management fees, date founded, and other information.

High income taxpayers love municipal bonds, as they provide income that is tax free from Federal income taxes, and if the bond is issued from the state in which the taxpayer resides or from one of the territories of the US such as Puerto Rico, then the income is also exempt from state taxes. Munis are generally issued by states, counties, cities, and other governmental entities such as school districts, sewer districts, bridges, and water and power departments. Here are the advantages and disadvantages of munis and muni CEFs.

Municipal Bonds

Advantages:

1. You can pick and choose what governmental agency you want to loan money to. Maybe you want to stick with the bonds from the cities and counties near you that you are familiar with.

2. Bonds have a maturity date. This means that no matter how high interest rates go, and no matter how low the bonds drop in value, at maturity, the bonds are paid off at par.

3. What your bond is worth is what your bond is worth; in other words, the trading price of CEFs may be far higher or lower than the net asset value of the fund.

Disadvantages:

1. Higher minimum investment. Although munis are issued in $5,000 denominations, a round lot is generally considered by many firms to be $100,000.

2. Less diversification. Because of the higher minimum, investors can’t own as many diverse bonds as they could with a CEF.

3. Interest payments only twice a year.

4. No professional management or monitoring.

5. Illiquidity. Munis are not traded on an exchange, and estimated prices given on brokerage statements can be way off from what brokers will actually offer you if you want to sell. This actually happened to me; I received an offer of five points less than what the statement showed a couple days before, with no change in interest rates over those couple days.

Municipal Bond Closed End Funds

Advantages:

1. No minimum investment. You could technically buy one share.

2. Monthly income.

3. With the monthly income, you receive you capital back faster, and you can do quicker compounding of your income.

4. Very liquid; traded on major exchanges.

5. Narrow bid and asked spreads compared to municipal bonds.

6. Can sell off small portions if funds are needed. In other words, if you had $10,000 invested and needed to cash in $1,000 worth, you could do it with a CEF but not with municipal bonds.

Disadvantages:

1. You pay a management fee and other administrative fees.

2. Some CEFs use leverage. You should beware that this increases the risks to the investor.

3. Some CEFs may be trading at a premium to net asset value. You want to look for those trading at a discount.

4. No maturity date (other than a few target funds). If rates go up and continue to rise during your lifetime, you may never get your principal back.

As you can see, there are benefits to both municipal bonds and municipal bond closed end funds. Just make sure that you are familiar with the risks and costs of each.

Disclosure: Author does not own any of the above at the time the article was written.

By Stockerblog.com

One recent article I read said the key to avoiding another recession rests with stabilized U.S. housing prices. Another article says we’re on the verge of a housing bubble in Canada. One day, Canada’s oil sands are doomed because of the dirty stigma associated with them. The next, “dirty oil” is here to stay everyone because North America’s thirst for black gold isn’t going anywhere soon and if anything, it’s going to go up. Markets up, markets down. A bubble over here and a bubble over there. No doubt the good news and bad news stories are everywhere. My head is spinning just thinking about the economic rollercoster ride and spindoctors in the media…

Instead of dwelling on that, I’m going to relax this weekend amongst some other commitments and read a few of my favourite blogs. There are a number of posts I didn’t get to, but many I did and below are a list of my favourites. Amongst a wedding and completing a course I signed up for almost six months ago (I have to complete it this weekend), my wife and I have some work to do around the house. But, once the chores are done, I fully intend to chill out and get some personal finance reading done. I’m feeling much better now; over my small illness, so although we have much to do this weekend, it’s time to celebrate and enjoy it. I hope you find time to do the same.

Happy reading!

Mich from Beating The Index put the latest interest rate forecast into the spotlight, questioning whether anyone (including all the talking heads) really knows where rates will go do you?

Balance Junkie had an insightful and reflective post about her stock allocation all in and none at all?

Andrew Hallam told us that Canadians might actually turn down Vanguard if they came north. Could he be right?

Boomer from Boomer & Echo wrote about having a financial plan and building retirement income.

Larry MacDonald introduced us to Nora Dunn, a lady with no fixed address who is a self-professed professional (and successful) hobo.

Canadian Capitalist informed us why he prefers US-listed ETFs, not ETFs hedged in Canadian dollars (and makes a good case for it as a long-term ETF holder).

Dan from Canadian Couch Potato told us how to reduce the costs of currency exchange.

Big Cajun Man shared his experience with TD Bank and the RESP cashing-in-process. Check it out!

Dividend Growth Investor wrote an excellent post about high income stocks you should consider holding in your portfolio.

Dividend Dollar told us not to let our emergency fund rot!

Dividend Monk told us to walk the path between investor overconfidence and fear to be successful. A great read, and likely a narrow path for many DIY investors!

Money Energy reminded us about corruption and greed that exists on Wall Street. What are those seven deadly sins again?

Kevin from Invest It Wisely got a little philosophical this week and reflected on opportunity costs, why they shouldnt be ignored.

The Loonie Bin wrote about early retirement. I’m trying!

Michael James reminded us to manage our expectations for investing returns and always think in post-inflationary dollars. I need to do that more!

Passive Income Earner reported his net worth update for the month and kudos to him, it keeps climbing…

Young & Thrifty wrote to her readers about spending money to look good.

Preet from Where Does All My Money Go and Dan Bortolotti from CCP are giving away tickets to see Sir Richard Branson! Oh yeah, and some other guy, the CEO from ING Direct.

Cheers!
Financial Cents

However, there is another safer way to invest in the company and get a much higher yield, with inflation protection. Morgan Stanley happens to have a preferred stock called Morgan Stanley Floating Rate Depositary Shares Non-Cumulative Preferred A (MS-PA). This security currently sells for 20.15, a big discount to its par value amount of $25. The first call date is 7/15/2011.

The annual dividend payout is one dollar per year based on 4% of the par value, payable quarterly, giving the stock a current yield of about 5%. The dollar a year dividend is the minimum payout, as the yield is adjustable upwards if rates increase. The rate is based on the three month LIBOR rate plus 0.7%, subject to the minimum.

If you like these adjustable rate preferred stocks, you should take a look at How to Get a 6% Yield from Chesapeake Energy (CHK), How to Get a 4.9% Yield from Goldman Sachs (GS), and Lucent (ALU) Pays a Yield of 13%.

A list of about 20 adjustable rate preferreds, with yields ranging from 1.83% to 8.59%, is available at WallStreetNewsNetwork.com. The list includes the minimum yield, the floating rate calculation, the par value, annual income and yield.

Disclosure: Author does not own any of the above.

By Stockerblog.com