Grow Up To 1,000% Richer In The Great Stock Panic Of 2002


Chapter 24

How To Pick Up Great Bargains

If instead of 1,000% gains from the Great Stock Panic, you wind up with 300% gains, I don't think you will be complaining too much. And if you can then reapply those profits in bargain basement opportunities, you can multiply those gains by three or four times again, giving you even more than 1,000% profits overall.

First, you should know that even in a falling economy, there are certain gemstones that stand out from the rest and can be bought long before the decline is over.

Second, as the Great Stock Panic reaches a crescendo, peaks, and then subsides, not all investments will hit bottom at the same time. It's hard to predict with certainty, but here is approximately the chronological sequence of the bargain buying opportunities I see ahead:

Bargain Opportunity #1
Energy Companies That Will
Profit From Chronic Shortages

It's no accident that the world came to the brink of a monstrous new oil crisis in the first 15 months of the new millennium.

OPEC, which produces 40% of the world's oil, imposed cutbacks totaling 3 million barrels a day.

In the US, crude oil stocks and heating oil inventories reached dangerously low levels. Domestic production had fallen steadily since 1970. Imports had ballooned. Dependence on foreign oil was out of control.

Right now, a worldwide economic decline will dampen the demand for oil, temporarily reducing the risk of another devastating energy crisis. But it will not change the fundamental supply shortage. Nor will it stop OPEC and other countries from cutting supplies. Therefore, even before the worldwide economic decline is over, energy shortages are bound to re-emerge with a vengeance; and any alternative energy source will be in high demand. Here's a brief overview:
  • Solar Power: The least polluting and most inexhaustible of all known energy sources. Solar power has been unreliable in the past, but new technology is changing that. Presently, solar energy can be used for everything from providing juice for calculators to heating buildings, running cars, and even providing photovoltaic energy for full-scale power plants.

  • Hydroelectric: This cheap, low-maintenance power source comes from the damming of rivers. Many utility companies already use hydropower. In the United States only a third of available hydroelectric power has been harnessed.

  • Fuel cells: Fuel cells create electricity from an electrochemical reaction between hydrogen and oxygen. Because they use a chemical process to generate power without burning, and contain no moving parts, they're quiet, efficient, and reliable, emitting little or no pollution. The dream of making fuel cells safe and economical is only now coming true.
Here are the alternative energy companies we are watching right now:

AstroPower, Inc. (APWR - Nasdaq): This state-of-the-art company makes and sells photovoltaic solar cells, modules, and panels. AstroPower's patented Silicon-Film process allows it to make its products very economically and manufacture wafers and cells in virtually any size. The Los Angeles Convention Center now generates its own electricity thanks to AstroPower solar panels.

FuelCell (FCEL - Nadaq): This company is installing a direct fuel cell power plant in Los Angeles that's big enough to power a 100-home subdivision. FuelCell is working on bringing even bigger fuel cell plants to market soon. The company is also developing fuel cells for DaimlerChrysler.

IdaCorp, Inc. (IDA - NYSE): This public utility and holding company holds investments in 13 operating hydroelectric plants, and it is participating in the development of geothermal power plants, too.

Calpine Corporation (CPN - NYSE) is revolutionizing the fossil fuel market. It's the world's largest geothermal power producer, but its main power source is fossil fuels specifically, natural gas. Calpine has 5,900 megawatts in operation, 14,000 megawatts in construction, and 16,200 megawatts in announced development all using the latest technology.

If you buy them at the right time, each of these could give you an easy double or triple just for starters. But right now is NOT the time to buy. As the stock market decline deepens and broadens, investors will be throwing out the baby with the bath-water, including some of these great, innovative companies.

Wait for my signal to buy. And don't be impatient. Better to risk missing the first leg of their rise than to buy prematurely and watch your stocks be dragged down by the rest of the market.

Bargain Opportunity #2
Medium-Term US
Treasury Notes

As you've seen from earlier chapters, jumping prematurely into long-term bonds could turn out to be one of the great investment mistakes of the century.

Reason: Hidden forces that could drive bonds down dramatically foreign selling of US bonds, a decline in the dollar, forced selling of bonds by US financial institutions in trouble, and panicky demand for cash everywhere.

Instead of being afraid of these forces, however, you should welcome them; they will give you the opportunity to scoop up bond bargains of a lifetime.

The first securities to rally should be those with the highest rating in the world US Treasury securities. So that's where you should start buying.

There are three categories of fixed-income instruments short, medium, and long term. With US Treasury securities, for example:

Short: Treasury bills mature in less than one year. The most popular are 3 month T-bills.

Medium: Treasury notes are between one and 10 years.

Long: Treasury bonds are 10 years or greater. These offer the greatest opportunity for yield and capital gains. But they are also the most volatile in price.

Starting with your funds in Treasury bills, the first buying opportunity I see ahead will be to buy the medium-term Treasury notes. Like Treasury bills, when you buy Treasury notes you enjoy the advantages of an unlimited government guarantee of principal (no maximum amount), excellent liquidity, higher yields than usually available on Treasury bills, and state income tax exemption.

But unlike Treasury bills, Treasury notes do involve some price risk. If you decide to sell your Treasury notes before they mature, you could earn a profit if their market price goes up, or suffer a loss if it goes down.

The great advantage of Treasury notes is that you never have to take a loss if you don't want to. If you can wait the full term, you are guaranteed 100% of your principal plus interest.

The longer the maturity, the greater the price volatility. So a 2-year note usually changes very little in price. A 5-year note changes somewhat more. And a 10-year note undergoes greater price swings.

To take the best advantage of Treasury notes, we recommend that you:

(1) Try to wait for the panic to drive prices down before buying them. If prices go back up, you can sell them at a profit if you wish.

(2) Use only funds that you won't need until maturity. That way, if the price declines further, you can just hold on, earning the yield, and avoiding a capital loss. But when there's an opportunity for a significant capital gain, you are free to take it.

(3) Purchase varying maturities scheduled to come due at different dates in the future. This "laddering" technique provides higher rates than investing only in short-term T-bills when interest rates are declining. And when interest rates are rising, you have funds coming available at regular intervals to reinvest at the higher rates.

Depending on interest rate trends, we may vary the recommended maturity and the recommended allocation to Treasury notes. So make sure you check the current issue of Safe Money for details.

Bargain Opportunity #3
Long-Term Treasury Bonds

Falling bond prices during the initial phase of the Great Stock Panic will probably come as a big shock to both investors and economists. That's because most don't even recognize this as a possible scenario. They base their forecasts on the experience of the postwar period.

And in the postwar years, this has never happened. So they assume it will never happen in the future. However, as I've shown you in this book, there have been several real situations in which Treasury bond prices plunged even as the economy sunk.

Both in the 1930s and in the future, the ideal time to buy long-term bonds is at the tail end of Phase #2 which I described to you in Chapter 16 when bond prices are at a bottom, and a great rise in bond prices is about to begin.

Unfortunately, however, it won't be easy to catch the bottom. Most investors will be too preoccupied with other pressing matters or simply too frightened by the rapid cascade of events. Others will be dissuaded from buying bonds by their fears that the country is "going to hell in a hand basket." This is bound to cause severe fluctuations in bond prices.

Therefore, the wisest investors will move into long-term bonds in stages. Starting off with, say 100% of your cash assets in 3-month T-bills or a money fund that owns only Treasuries, here are the steps we are following.

During Phase 1 the interest rate decline you should keep most of your cash in T-bills and some in notes. (Check the latest issue of Safe Money for our recommended allocation.)

During Phase 2 the interest rate spike, you shift most of your funds to Treasury bills, despite the low yields.

Finally, in Phase 3, as interest rates come back down, you should shift more aggressively into Treasury notes and bonds. We will tell you exactly how much when the time comes.

Fourth, once we see significant improvements in the financial health of corporations, we may shift a portion of the portfolio from Treasury securities to highest quality corporate securities, which leads me to ...

Bargain Opportunity #4
High-Grade Corporate
Bond Yields

As I showed you in Chapter 16, these declined during Phase 1 and then surged to new highs during Phase 2. In the Great Stock Panic, I expect a similar pattern.

The panic is bound to cause surging default rates by weak borrowers. This includes not only small- and medium-sized companies that have traditionally been hurt the most in a recession, but also some of our nation's largest corporate giants, which, due to the merger-mania of the 1990s, have continued to accumulate large debts. At the same time, America's consumers which the corporate giants depend upon for their revenues are more deeply in hock today than ever before in history.

Here's the key point: When investors are scared away from the bonds of weak companies, they also shy away from the bonds of stronger companies, driving all corporate bond prices down.

That's when you can step in and pick up some great bargains. While other investors are throwing the baby out with the bath water, you will be picking up the cream of the crop at deeply discounted prices and high yields.

We expect that you may be able to get excellent yields on highest grade 30-year telephone bonds, bringing you and your family a high, steady income for nearly two generations, the best electric utility bonds, and blue-chip corporate bonds issued by solidly capitalized companies.

The good news comes in Phase 3. That's when the liquidation of old debts is complete, things return quickly to normal, and bond prices can recover. However, no matter when you buy them, low grade corporate bonds must be viewed strictly as a speculative opportunity. When the time comes, we may recommend some, but it will be strictly for funds you can afford to lose.

Bargain Opportunity #5
Companies With Promising
New Technologies Selling For
Pennies On The Dollar

It's too soon to name names. But major buying opportunities are coming in:
  • Alternative Energy. The California energy crisis of early 2001 was merely a sneak preview of the surging demand in years to come. As economic activity bounces back from depression worldwide, energy needs will go through the roof, and companies that can meet the demand cheaply will surge in value.

  • Fiber Optics. The World Wide Web of the early 21st century is merely a primitive prototype of the Supernet of the not-too-distant future. But the key lies in the broad bandwidth and lightning speeds that only fiber optics can provide.

  • Genetic Engineering. This is scary to my generation. I myself shy away from it. But for better or for worse, today's technological revolution will lead the way toward changes in cultural, moral, and ethical standards; and this new, powerful science will do the same. I trust new laws and new rules will block those who would want to play God, while empowering those who understand the true limits of man. No matter what, however, the opportunities for investors will be boundless.

Bargain Opportunity #6
Smaller, Innovative Companies
Selling For Even Less Than
Pennies On The Dollar

We just ordered a three-pound laptop computer for $2,000 that's a thousand time faster than the $100 million "super-computers" that filled an entire building a generation ago.

In France, a man who's been paralyzed with a severed spinal cord for 10 years is beginning to walk again, thanks to a tiny micro-chip embedded in his back.

They're growing human skin in factories for burn victims. Gene based drugs are beginning to knock out breast cancer. They have a drug that cures many types of arthritis and it's available now.

What will happen in each of these areas is as revolutionary as when Microsoft developed Windows and opened up the world of computers to people like you and me. It will be a whole new era and you can make a fortune out of it when the panic phase is over.

To take advantage of these opportunities, you won't need much money they will be so dirt cheap. But you will need courage ... and patience.

Courage to defy those around you who have lost faith in all stocks, in the entire country, and in their own future.

Patience to ride out some bumps along the road while the country struggles to recover from the money panic. Will the Great Stock Panic be as severe as I have described? Perhaps not. Or, it could actually be worse. No one can say with certainty.

But never forget the fundamental dialectic of history: Good is borne from bad. So, the more severe the decline, the more you will be able to gain from the recovery that will inevitably follow.

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