Sunday, September 16, 2007

Dividends - Three Special Corporate Forms Bring High Yields

In your search for solid dividend-paying companies, you will frequently encounter three special kinds of corporations. They have chosen to organize themselves under federal laws that allow them to avoid corporate taxation provided that they pay out, or distribute, the bulk of their profits to shareholders. For this reason, these companies appear frequently in lists of high-yielding dividend-payers. All three special forms of companies have ticker symbols, and their stocks trade just as other companies trade.

Here is a primer on these three special corporate forms:

Real Estate Investment Trusts (REITs)

REITs were created by Congress in 1960. They come in two flavors: Most REITs are essentially landlords, holding properties from office parks to apartments to shopping malls. A far smaller number of REITs are mortgage REITs, involved in real estate financing.

To qualify as a REIT, a company must distribute at least 90 percent of its taxable income in the form of dividends. Historically, most of the return from REITs has come from these dividends, although many have delivered attractive price returns to boot.

REITs are the only practical way for most individuals to invest in residential and commercial real estate developments. Real estate is often considered to be a distinct asset class (beyond the big three of stocks, bonds, and cash), so REITs offer the investor some diversification benefits. Current dividend yields often are 5 to 8 percent or more, right out of the gate for new buyers.

Note, REIT dividends do not qualify for the 15 percent federal income tax rate on most dividends. They are taxed to the shareholder as ordinary income. That is because the earnings were not taxed at the corporations level.

Master Limited Partnerships (MLPs)

MLPs are also a special form of structure. In fact, they are not corporations at all, but partnerships. By law, their activities are limited to the production, processing, and transport of natural resources, plus some operations in real estate.

MLPs appear mostly in the oil and gas industry. They provide small investors a way to participate in pipeline partnerships and other oil and gas operations that otherwise would not be possible. Because the shares trade, beyond the partnership distributions there is also the usual potential for capital gain or loss.

Every MLP has a general partner which manages and controls the partnership. Shareholders in MLPs (technically unit holders) are limited partners in the enterprise. They own an interest in the assets of the business, which in turn entitles them to dividends and other distributions, and also to benefit from depreciation of the assets of the business.

Taxation of MLPs was established in 1987 by Congress. The partnership does not pay taxes itself, so the distributions sent to unit holders do not qualify for the federal 15 percent cap on dividend income. However, not all of the distribution sent each quarter to unit holders is a dividend. Some of it is a return of the original capital invested. The returned capital, in effect, reduces the cost basis of the investment (as if the shareholder had spent less per share in the first place). Returned capital is not taxed in the year it is distributed, but it is taxed when the unit holder sells the shares. That is because there will appear to be more profit on the sale of the shares, since the returned capital over the years reduced the cost basis. So the returned capital is not, as is sometimes stated, non-taxable; rather the taxation is deferred. When you finally sell those shares, the taxation catches up to the capital returned over time.

Because of their unique structure and tax situation, MLPs must mail an IRS Schedule K-1 to each unit holder every year. This reports the unit holder's share of the partnerships taxable and non-taxable income, gain, loss, deduction, and credits. It is really not that difficult to deal with, and any competent tax preparer is familiar with K-1s.

Business Development Companies (BDCs)

BDCs were created by Congress in 1980 to help provide capital to small businesses. They have been much in the news lately, usually under the term private equity, as there have been dozens of recent deals in which companies have been taken private. That means that public companiessome of them quite largehave been bought in their entirety by private equity companies with huge amounts of capital at their disposal.

Many of these private equity deals have been made by companies which are truly private, but some of the private equity firms have themselves decided to go public, becoming BDCs. (Never mind that the size and nature of the resulting entity and its investments may be far outside the original purpose and spirit of the law.) When a private equity firm is itself public, that means that the individual investor has a chance to participate in big deals that would otherwise not be possible.

The law requires BDCs to at least annually distribute the bulk of their net investment income and capital gains to shareholders. Thus they often have attractive dividend yields. As with REITs, these dividends are not subject to the 15% cap on dividend tax rates for their recipients. And since the shares of BDCs trade, there is the potential for capital gain or loss associated with any public company.

Dave Van Knapp is the author of Sensible Stock Investing: How to Pick, Value, and Manage Stocks. Find out more about how to become a successful individual stock investor at => . Or go directly to the book on, where it has a 5-star rating from readers => .

I encourage you to reproduce this article or any portion of it. If you do so, please include the title, author, and the following Web site address: . Thank you.

The Benefits Of Investing In ISAs

People are always looking for news ways in which to make cash savings or investments. One popular method of tax-free savings is by opting to save money in Individual Savings Account (ISAs), which were introduced by the UK government in 1999 to replace PEPS and TESSAs. Whether you choose to use an ISA to save cash or invest in stocks and shares, the benefits of ISAs are sure to be diverse and hugely rewarding.

In fact, the advantages of ISAs are numerous. For starters, there is no income tax to pay if you invest in an ISA, a factor which is a particularly strong selling point if you're a high rate tax payer. Under existing tax legislation, people paying higher-rate tax have to pay 25 income tax on every 100 received in dividends on an investment not held in an ISA. Therefore, investing money in an ISA eliminates this cost. And if you're not currently a higher-rate tax payer, investing in an ISA now will mean that if you move into a higher tax bracket in the future, you'll still avoid income tax on your investment.

Moreover, there are no capital gains to pay on an ISA. Capital Gains tax is a tax that is paid to the Inland Revenue on any rise in the value of savings and investments. Over the long term, small but regular payments into an ISA can generate tens of thousands of pounds - therefore, the long-term benefits of eliminating capital gains tax from your investment could be considerable, and certainly worth thinking about in advance.

Additionally, if you hold bonds in ISAs, you can still receive a tax free income. And even if you don't want to invest in bonds at the present time, there is always the possibility that you may want to in the future. In this sense, investing in ISAs is even more beneficial. Furthermore, you won't have to mention your investment in an ISA in your tax return form, which can be an arduous task. Ultimately, investing your money in an ISA means that you'll no longer need to worry about tax on your investment - a factor that is sure to be a huge weight off the mind of any tax payer!

Some of the best cash ISAs can be found in a range of locations, both online and on the high street, from a variety of sources. Many government institutions offer high interest ISAs, and banks and building societies also offer a selection of ISA accounts. But, wherever you choose to make your ISA investment, you can rest assured that the benefits are sure to be plentiful.

Adam Singleton is an online, freelance journalist and keen amateur photographer. His portfolio, called Capquest Photography is available to view online.

Lessons Learned From An E-Commerce Adventure

It is better to have tried and failed than never to have tried at all; and even more important to learn from your mistakes.

That is what I keep telling myself after having invested the time and cash equivalent to a Harvard MBA in an e-commerce start-up that has stalled and is winding down. Not a happy prospect in light of all the media pre-occupation with e-commerce success stories and the young millionaires watching their IPOs rocket into cyberspace. But the headlines ignore the more frequent stories of new e-commerce businesses that do not hit the stock market jackpot. Many of them either settle into a low-key niche or exhaust their resources and fold.

This is the story of an Internet venture that did not make the headlines, but offers some useful insights for entrepreneurs evaluating their own initiatives. The lessons learned are applicable to your own new venture or to an investment in someone elses.

In mid-1998 we launched a new company called nxtNet ( with the slogan "taking you to the next level on the Internet".

My partner and I both had prior successful entrepreneurial experience in computer products and wanted to start a new venture together. We decided to develop a business that would catch the next wave of e-commerce services for mid-sized companies seeking to do business on the Internet. After long discussions, searches for a unique service offering, and many draft business plans, we developed a market strategy and then chose Intershop Communications as our software development platform. This product had the advantages of being suitable for single or multiple online storefronts, and offered a flexible, economic and comprehensive solution. We committed to the product, staffing, facilities and equipment to start training and development immediately. The two of us provided the time and cash required to get started.

By October 1998, we had an initial product with application as an online storefront for an associated computer business. At the same time, we realized that the application had wide appeal to other computer dealers and could be sold as a multi-user database service and e-commerce resource. We had developed a consolidated catalogue of 85,000 computer products from multiple distributor product databases that allowed rapid search and comparison for product information, pricing, and current sources. Users could access the catalogue from the Internet and find a product by manufacturer, category, and part number, key word or price range and immediately see the alternate sources and prices with links to more technical information, preferred dealer pricing and actual stock levels. Additional features allowed the catalogue to be customized so that any computer reseller could present the database as his own online storefront. This option offered all the search and product information features to his customers, but showed only retail pricing and enabled the online ordering process.

The product offering quickly received positive feedback and strong indications of support from all the participants resellers, distributors, and manufacturers. It was a comprehensive, powerful, and effective tool for buying and selling at all levels within the Canadian computer distribution channel. Resellers recognized the value in an online resource to save time and effort. Distributors and manufacturers saw the opportunity to promote their products, and major publishers in the industry wanted to offer complementary online services to their subscribers and advertisers. How could we fail with all this enthusiasm and support?

While the potential for success clearly existed, everybody had the same questions and reservations "Who is there now?" "How many are using it?" and "I dont want to pay until its bigger".

Reasonable objections we thought, so we added features and content for free. We promoted the product with free trials and low cost subscriptions for reseller access. Then we coaxed, persuaded, sold hard, and made deals. The "contra" became the standard for obtaining press coverage, free ads, mailing lists and promotion in exchange for free participation and future consideration. Activity on the Web site and catalogue grew to 3000 visitors per month with over 800 subscribers and the distributor list increased from three to twelve.

But revenue remained near zero as most reseller subscribers declined to pay for the service. Reasons were "it should be free let the advertisers pay", "I dont use it enough", "there are lower cost options", or "we built our own solution". The audience did not grow fast enough even after we offered it for free, to satisfy the advertisers and content providers. Without persistent and conspicuous sales and marketing efforts, all the participants quickly lost interest. Meanwhile the costs of database maintenance, ongoing development, site hosting, Internet access, sales, marketing, and administration were increasing.

Clearly the old entrepreneurial model of controlling costs and growing revenue was not going to apply. We had to realign our profile to show how zero revenue and high initial costs could still lead to significant investment returns like other well-known Internet ventures. So from early 1999 we started an aggressive search for financing, estimating our requirements at $500,000 to $1,500,000 over the next two years before achieving positive cash flow. More business plans, spreadsheets, and glossy presentations to demonstrate future valuations up to $20 million, even $40 million.

We knocked on many doors, from banks to government agencies, from angel investors to venture capital, from stock promoters to business consultants, and again received lots of encouragement, but no financing. So the founding partners were faced with a continuing cash drain, no relief in sight, and the limits of their own resources rapidly approaching. It was time to put the project on hold. Strategic partners or investors might still be developed to proceed with the project, but the ongoing expenditures were stopped in late 1999.

So what are the lessons learned? We already knew that nothing ventured, nothing gained. We now also knew that big successes in the new economy require big investments. Entrepreneurs may start small, but large investments will be required from new sources to achieve significant success. And no one will put significant money into a venture unless it is the only remaining requirement.

The concept, product, development, marketing and staffing all have to be in place before an investor will provide the final ingredient his cash. Exceptions are likely only where the management team has already succeeded in the same arena, or the investor himself can deliver the missing elements, such as customers or management skills. No investor is going to take the chance that the entrepreneur with a good concept or product will also be able to deliver the required management and marketing skills to succeed, after he has the cash.

Next time we will know better. And there are side benefits from this expensive learning experience. I can now admit that with the knowledge gained through our association with Intershop Communications, I was confident enough to make an investment in their stock on the German Neue Markt at 65 Euros last year. It went over 400 Euros last month and is still rising with their rapid growth and the prospect of a NASDAQ listing this year. Almost enough to recover my investment in nxtNet.

So the most important lesson is that education in the new economy is essential, and not free, but it can lead to success outside the original plan. Learn, be aware, and be aggressively opportunistic.

Del Chatterson


Economic Survival in the 21st Century - the Three Key Questions to Ask

In this special report, I want to pose a few important philosophical questions to my readers. Firstly -- our Federal Reserve Chairman, Alan Greenspan, addressed the effects and implications of our aging population on things such as Social Security again in a speech that he made last Friday. Readers may remember that I also briefly mentioned this issue in my June 24th commentary. I urge you to keep this worldwide phenomenon of the aging population firmly on the back of your minds. If you are like most people, then you earn you living by producing a certain thing such as a consumer good, or a service that the masses want. Lets face it how many people really struck it rich by being pure traders or investment managers? The stock market and other financial markets are definitely very important to us investors/traders but this super secular trend of the aging of the worldwide population will impact every aspect of our lives, whether it is losing our relative competitiveness on the world arena, increasing pension and healthcare costs, or even a potential fundamental change of our political system.

The second question that I want my readers to think about is the potential end to the era of cheap energy prices an era which we have basically enjoyed for the last two decades without thinking of the long-term repercussions. The United States, with less than five percent of the worlds population, currently consume approximately 25% of the worlds energy each year. Supply is maturing while demand continues to surge as exemplified by the surging in demand from China and India. In the meantime, spare energy-producing capacity and inventory levels have been at all-time lows potential for a perfect storm?

Finally, I want to ask my readers the following question: What kind of investor are you? What investing style do you adopt and what investing style are you most comfortable with? Can you be a contrarian and buy when the crowd is selling or are you merely a follower who is only comfortable if you fit in? These are straightforward questions but these are questions that you really need to ask yourselves in order to truly make money in investing over the long run. If my readers take the time out to thinking about these three questions or issues and ultimately have a firm grasp of even just one of the issues then you will be in a much better economic situation than most Americans five to ten years from now.

To begin, what are the potential implications of the aging population phenomenon? Readers my recall that in my June 24th commentary, I stated: Assuming that the current level of benefits remain into the future and assuming the level of taxes is not raised, then public benefits to retirees would dramatically increase going forward. On the extreme end, Japan and Spain will see a more than 100% increase in their outlays to retirees. Clearly, this is not sustainable. Either things such as defense or education spending will need to be cut, or the above countries will need to raise their taxes. Neither of the two scenarios is optimal. Borrowing more of their funds is not a long-term solution. Cutting funding in defense and education will comprise a countrys future, and raising taxes will place a huge social and financial burden on the population of the developed world where taxes are already at a historically high level. Think about this: If you were a bright, young, French industrialist and you were forced to pay 60% of your income as taxes to support the elderly, what would you do? Why, you would vote with your feet and relocate to another country that is more tax-friendly and business-friendly and so will other great talent that may have been a great contribution to the French economy. The governments of the developed world recognize this but there are no easy solutions.

This picture gets grimmer when one takes note of a study that was done by the Bank Credit Analyst. In that study, the BCA predicts that by the year 2050, the percentage share of the developed countries of the global population will drop from over 30% in 1950 to less than 14% -- or about equal to the population of the Islamic nations of the world. Similarly, Yemen will be more populous than Germany in 2050; while Iraq will be 30% more populous than Italy (Iraq is less than 40% the size of Italy today). Russias population is projected to continue to decrease at a rate such that the population of Iran will be even higher to that of Russias in 2050. India will be the most populous nation in the world, and Pakistan will only lag the U.S. by approximately 50 million people. If the developed countries of today do not choose to work harder or become more efficient, then they will ultimately lose their comparative advantage, as the younger population of the world is inherently more hard-working, energetic, innovative, and creative. In todays globalized world, this will be a killer for the average worker in the developed countries the more so once the language barrier is eliminated (the successful commercialization of universal language translators is projected to happen in ten to fifteen years). I am generally more optimistic, as the elimination of the language barrier will greatly enhance business opportunities and efficiencies, but a person such as the average American worker will loss his or her comparative advantage in the global workforce. The availability of a huge supply of labor should also drive down wages in the global marketplace and most probably increase the maldistribution of wealth in todays developed countries.

Like I have mentioned before, there are no easy solutions. If the average American sees an increase of 10 years in his or her life expectancy, can he or she reasonably or logically retire at the current normal retirement age of 65 (which was determined during the Roosevelt administration during the 1930s) without placing an undue burden on the system? The answer is most probably no. Applying the same working-years-to-retirement-years ratio to his or her new life expectancy, then the average American should probably work around five to six years more thus giving a revised normal retirement age of 70 or so. Moreover, all this analysis is based on the outdated population distribution in the form of a pyramid where the younger and more able workers represent a majority of the population (and where the elderly represents only a small minority of the general population). The pyramid distribution has historically facilitated government support of the elderly as the monetary and social burdens have been shouldered by a relatively large younger population. The current experience of Europe and Japan suggests a more uniform distribution in the population of those countries going forward as the birthrate in those countries are now dismally below the replacement rate of the population. The situation in the United States is not currently as drastic (given our relatively lax immigration policy) but we are heading towards the same direction. Thus to maintain the current standard of living at retirement, my guess is that the general population will not only have to work longer, but work longer hours in the present (and save more) as well.

The situation is more alarming when one considers that the combined population of China and India makes up over 1/3 of the worlds population. The number of unemployed workers in China is greater than the entire labor force of the United States. The competition for relatively unskilled jobs will continue, and it promises to accelerate going forward. The average American who does not stay ahead of the curve or does not keep pace of the trend will find his or her job being outsourced not to mention the average wage being driven down by global competition. I, for one, believe that this continuing trend of globalization will make the world a better place, as hundreds of thousands of people will finally be empowered as they climb out of absolute poverty (again, over half of the worlds population currently live on less than two dollars a day) and as the prices of consumer goods are driven down still further. The average American will probably disagree, but the trend of globalization and offshoring will not stop. The last time the United States adopted economic and military isolationism we had a Great Depression and subsequently, World War II. I sincerely do not think that this was a coincidence.

The trend of the general aging population and globalization will have a profound impact on all Americans. Ultimately, I think all Americans will benefit although it may not be clear to people who are losing their jobs today. For the initiated and nimble, you will not only survive but thrive in these interesting new times. Imagine a market for your product that is over ten times the size of the population in the United States. China and India has historically disappointed as the citizens of those countries have historically been too poor to consume much U.S. goods and services. Globalization and offshoring will change all these. A world more equalized economically will also mean a much more secure and less conflictive world.

Now, I want to address a similar concern of all Americans as the era of cheap energy (basically the cheap energy prices as experienced by Americans for the last twenty years) comes to a close. While I think oil prices will decline in the short-term (i.e. for the next few months), I am longer-term bullish on both oil and natural gas prices (I will only discuss oil in this commentary). Consider the following:

  • The world supply of oil is flattening out. Readers may not know this, but the United States today still produce enough oil to satisfy approximately 40% of total domestic demand. The United States also had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest in the world. According to the Energy Information Administration (EIA), the United States produced around 7.9 million barrels per day during 2003. This is down sharply from the 10.6 million barrels averaged in 1985. The peak of domestic oil supply occurred sometime during the 1970s. Today, total domestic production is at 50-year lows and still falling.
  • While Saudi Arabia (the worlds top exporter and contains 25% of the worlds reported reserves) has claimed that there are and will be no supply problems for the next few decades, they have not been transparent with their reserves data. According to Simmons & Company International, five to seven key fields in Saudi Arabia produce 90% to 95% of its total oil output all but two fields are extremely old with the last major find reported in 1968. The last publicized reserves data was in 1975 when Saudi Aramco was still managed by Exxon, Mobil, Chevron and Texaco. In that report, the worlds best experts determined that all the key fields at that time contained 108 billion barrels of oil in recoverable reserves. If this holds true, then the peak of supply in Saudi Arabia will come soon. Moreover, if the report is correct, then there is really no plan B (unlike during the 1970s when the center of power shifted from the Texas Railroad Commission to OPEC due to the peaking of supply in the United States) crude oil prices will soar.
  • The last frontier for the production of oil (namely the North Sea, Siberia, and Alaska) is now aging. Most companies are now struggling in order to even maintain their current production levels.
  • World oil demand continues to grow. Oil demand in the early 1990s stayed relatively flat (at around 66 to 68 million barrels per day) but over the next ten years to today, world oil demand increased 14 million barrels per day. Today, total world oil demand is greater than 82 million barrels per day. The energy experts who in the early 1990s predicted a flattening of oil demand growth and who wrote off demand growth in developing countries were dead wrong.
  • No new refineries have been built in the United States for the past two decades, even as refineries have been closing every year during that same time period. Refining capacity from 1981 to the mid 1990s also dropped drastically (this author estimates a drop of approximately 6 million barrels per day in refining capacity during that time period). Since 1994, however, an expansion in refining capacity at existing refineries has contributed to an increase in refining capacity from 15.0 million barrels per day to 16.7 million barrels per day (as of today). Despite this expansion, however, domestic refining capacity is still stretched to the limit, as utilization at U.S. refineries is now averaging nearly 90% -- leaving no cushion room if something unforeseen happens.

There are currently three factors at work which should contribute to a continued increase in the world oil price the maturing of supply, growing demand, and the lack of a cushion in refining capacity and low inventories. The culprit has usually been labeled as China, but it is interesting to note that the United States has had virtually no domestic energy policy (in terms of conservation and encouraging the development of alternative fuels) for the last twenty-something years. China demand, however, has soared over the last few years. It is now the second biggest oil consumer, having just surpassed Japan for the title. Demand for oil in China has more than doubled over the last 10 years (to todays 6 million barrels per day), and this amazing increase is projected to continue, especially given the fact that oil demand in China is still a lowly 2 barrels per person per year (compared to 25 barrels per person here in the United States). Furthermore, it is interesting to note that the number of cars in China only totaled 700,000 as late as 1993 and 1.8 million as late as 2001. Today, the number of cars in China totaled more than 7 million and this number could potentially have been much higher if not for the Chinese government intervention in limiting the number of cars that could be sold and driven each year. Now the most scary part: Current oil demand in India is only 0.7 barrels per person per year given this fact, oil demand in India could potentially explode over the next decade barring a huge worldwide economic recession or depression.

I believe my readers should be made aware of the current energy supply/demand situation. Given the above, what is the best course of action for the average American? How about the best course of action if you were the head of a motor company like GM or an airline pilot employed by a legacy airline like Delta? How about the best course of action for a mutual fund manager or a commodity fund manager? Since there are no easy solutions, there should be no easy answers either. In the short-run (three to five years), Americans will have to pay up if we want to drive gas-guzzling SUVs, and legacy airlines like Delta will have to continue to cut costs by probably further slashing labor costs as their first priority. A further improvement in extraction technology should help, but the serious development of alternative fuels will have to start now. I also believe that the next serious decline will be induced by a combination of an oil shock and a rise in interest rates. Readers may recall the relative strength chart that I developed in my August 15th commentary showing the AMEX Oil Index vs. the S&P 500 and the huge potential inverse heads and shoulders pattern in that chart. For now, the relative strength line should bounce around the neckline (the line drawn on that chart) possibly even for a few years but once the relative strength line convincingly breaks above the neckline, crude oil prices could rise to $80 or even $100 a barrel. I sure hope that my readers would not be taken by surprise if gas prices at the pump soars to $4.00 a gallon five to six years from now.

Finally, I want to pose to my readers the following question: Have you taken the time out to learn more about your psychological makeup and how it has affected your investment or trading decisions? What type of person are you when it comes to the market? Are you a so-called buy-and-holder, a swing trader, or a day trader? An independent thinker, a contrarian, a momentum investor or merely a follower? I am asking you these questions because of my following considerations:

  • This author believes that we are currently in a secular bear market in domestic common stocks. While I believe that this current rally still have more room to go, I believe that a cyclical bear market will emerge in due time this upcoming cyclical bear market may even take us back or below the lows that we hit during October 2002. If this is true, then a buy-and-hold portfolio would definitely not work unless you were in natural resources or precious metals mining stocks.
  • When this cyclical bull market tops out, all your friends, relatives, and the popular media will be telling you to buy more or to hold your common stocks. The bears and all bearish thoughts will be ostracized and frowned upon. This has happened in every bull market in everything in all human history. If you are in cash now, would you be able to remain in cash when the top finally comes or will you be unable to resist and buy in because you are afraid of the train leaving the station without you, so to speak?
  • Most people are inherently not good day traders or even swing traders. To be good in even the latter, you need a huge amount of dedication and discipline.

Investing or trading has always been dominated by emotions and always will be. My thinking in starting has always been that that if I can get my readers to buy in now, it will be a much easier decision for them to sell and hold cash once the DJIA reaches 11,000 or 12,000 or so as opposed to being in cash and staying out for the rest of this secular bear market. 99% of Americans are just not disciplined or dedicated enough to stay in cash during a secular bear market not to mention staying in cash during the entirety of a secular bear market and buying and holding common stocks during the entirety of a subsequent secular bull market. The average human psyche is just not capable of doing this. Because of this, I sincerely believe that success in the stock market (for most people) during the next five to ten years would involve catching the swings at the right or near-right times. For readers who just cannot resist, I am also going to continue to recommend some common stocks at opportune times, but in no way should my readers take my recommendations as gospel and in no way should my readers put all their eggs in one basket. If you are a person who can stay in cash for the next ten years and wait until the Dow Industrials has a P/E below 10 and a dividend yield of over 5%, then more power to you you are either already rich who have no need to make money in the market anyway or you are a very disciplined and independent-thinking person. Most Americans just cannot do that but I am here to help.

Henry To, CFA, is co-founder and partner of the economic advisory firm, MarketThoughts LLC, an advisor to the hedge fund Independence Partners, LP. is a service provided by MarkertThoughts LLC, and provides a twice-a-week commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing on the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses - as well as more general investing topics such as the Dow Theory, investing psychology, and financial history.

Your Forex Trading Style - The Spider Or The Cat Approach?

Forex trading is a very individual activity and each trader has a particular Forex trading style depending on their personality type.

Being able to objectively analyze our own trading style is a great asset. We can then develop our style into a more consistent trading method by identifying positive and negative characteristics. The following analogy from the natural world is a tool we can use for self-analysis.

The Cat Versus the Spider

What's the difference?

Cat's Chase Their Prey

Cats by instinct chase their prey. They may stalk for a while and then pounce and chase, following their prey.

Applied to the foreign exchange markets, this type of Forex trading style involves watching for a price breakout or a substantial move in one direction and then joining it, effectively chasing the market.

Some traders like to have this confirmation that price is definitely moving in a particular direction before joining the momentum.

Spider's Net Their Prey

A spider on the other hand spins a web and patiently waits for the prey to come to them. The unsuspecting fly gets caught in the net and the spider gets a meal.

This analogy, as applied to a Forex trading style, exemplifies the trader who carefully examines price action in relation to previous support and resistance levels and anticipates where price is going to stall.

This trader now places an entry order at the strategic level and waits for price to come to them. When it does and fails to break through, instead retracing or bouncing, the trader gets paid!

Advantages Of The Spider Forex Trading Style

While many traders are successful in going with the momentum there are decided advantages to the spider method.

Entering a trade once price has already moved in a certain direction by 20 or 30 pips exposes one to the risk of a retracement. A bigger stop is necessary to cover the possibility that price may go back 20 or 30 pips to retest a previous line of support or resistance.

Also, price may abruptly stop just after we enter a trade moving rapidly in one direction and then retrace taking out the stop for a loss.

On the other hand, after carefully assessing major lines of support and resistance by looking at the higher time frames and seeing where price highs and lows have been over the last few days, we can predict where price is likely to stall or retrace.

Using Fibonacci calculations along with pivot points we can sometimes see 2 or 3 layers of support and resistance. If price has already moved a substantial number of pips during the trading session, it is likely to stall at a key support resistance level. Entering a trade at this point means we can set a smaller stop and we are nearer to getting our profit.

On the other hand, price may have moved a substantial number of pips, perhaps 30 or 40 in one direction, and is now retracing. By looking at the previous high or low, and by using Fibonacci, especially the 50% retracement level, we can predict how far price is likely to retrace before continuing in the direction of the trend.

Submitting an entry order to get into the market at that key retracement level often means we can set the stop just 20 to 25 pips away, beyond the price swing or high for safety, and collect a good profit of 25-40 pips at the Fibonacci 127% extension level.

The One That Gets Away

Of course, the spider will sometimes see a powerful fly go straight through the web and knock a hole in it! That's the one that got away.

The spider Forex trading style will sometimes see price go straight through a strong support or resistance level and not hesitate at all. Again, that's the one that got away!

However, more often than not, price will react at key support and resistance levels. By adopting a patient waiting attitude, allowing price to come to you rather than chasing it, a safer trading approach can be developed, one that can contribute to consistent substantial profits in the long run.

Once you have identified your personal Forex trading style, see if there are lessons you can learn and adjustments you can make using the cat and spider analogy. Try to develop the habit of netting your profits as opposed to chasing them!

Learn how the MACD indicator can help you avoid much anxiety:

For a free pivot point calculator, Fibonacci calculator and the best free economic calendars click here:

For a free candle & chart pattern recognition reference tool click here:

Become Financially Whole!

I was watching Suze Orman with my wife today. A woman called in who is trying to reestablish credit after a prior bankruptcy. She told Suze that she had gone to a restore your credit seminar where the speaker taught the audience to get two secured credit cards. Secured credit cards are where you go to a bank and give them something like $500.00 and they give you a credit card with a $500.00 limit (or whatever you plop down to secure the whole deal).

The woman wanted Suzes advice because after she ran the limit up on both cards she was downsized and the only work she could find paid a lower salary. She told Suze she could not pay the cards because she was now paid a lower salary and was late on one of the cards already. Suze told her that there was absolutely no advice she could offer the woman and hung up.

Why do you think she would say this? I mean the woman could go get another job. She could get a loan from a family member or a friend. So why would Suze say this?

Well, Suze said that as long as the woman blamed her financial problems on external problems that she would be stuck. This is completely in line with what I told you in my last e-mail about forgiveness. Suze was really vague (as usual) but let me give you concrete concepts that you can apply in your daily life so you never end up like the woman in the financial train wreck who called in to Suze.

We only have two emotions; fear or love. Fear really sucks because it causes ALL of the problems in our life like sickness, death, poverty, bad luck, and soured relationships with other minds. In our financial lives fear causes debt.

On the other hand love is really great because it causes all of the good in our lives like, health, wealth, and abundance of every kind. In our financial lives love allows us to achieve financial freedom in great part through elimination of debt because if you come from a love based thought system you will sagely recognizes that you dont need a lot of crap our modern day you gotta have this society waves in your face.

The truth is that many (if not most) super rich people are also super miserable because of all of the fear in their minds that someone is going to take it all away! The trick is to become rich AND happily content. The super rich that have achieved this have come to recognize that the most valuable thing in their life is something that nobody can take from them without their consent; peace of mind!

We wouldnt be in this nut case world if each of us did not have some fear in our minds. This would make you a super stock investor in the stock market. So if the trick to achieving everlasting peace of mind is erasing all fear from our minds then is there a where the rubber hits the road practical method that acts like a fear eraser? The answer is a resounding yes!

The practical method that will lead you to peace of mind is true forgiveness that I alluded to in the last e-mail. The Course In Miracles, as long as the darn thing is, really just teaches you how to forgive and nothing else. Once you erase the crap in your mind (which is really just fear) your life will transform your life in ways that will seem unbelievable because your interpretation of your life experience will change. Most importantly your financial luck will change as well. Remember always that we are minds not bodies. We are the dreamer not the dreamed and as such we can reset the rules through he application of forgiveness in our daily lives and become whole instead of fragmented by fear!

Dr. Scott Brown, Ph.D. a.k.a. The Wallet Doctor can teach you how saving the daily price of a cup of coffee at Starbucks can make you a millionaire in the stock market through long term stock investing. Dr. Brown's website is:

Making Money In Forex Trading Fact or Fiction?

Find out the real truth about making money in forex trading.

Recently theres been a surge of everyday, average investors choosing to invest the majority of their portfolio in forex trading. If you talk with those people, you'll find many feel making money in forex trading is much easier than using more traditional types of investing.

The process used for making money in forex trading has a different set of strategies, and plan that trading stocks, mutual funds or bonds. The forex market is a little more complicated to learn, but once you understand the forex market and currency exchanges the possibility of making money in forex is good.

Making Money in Forex Trading - The Advantages

There are advantages to the forex market not available when you invest in the stock market realm. First off, industry changes and changes in company profits dont affect the forex market. Bull and bear markets wont cause major fluctuations as in normal stock trading.

Another advantage is the fact forex trading is open twenty-four hours a day, six days a week. Its not like learning about a major industry event in the evening news and not being able to do anything until the market opens on Monday. You can make your trades anytime of the day.

Learning about making money in forex trading has never been easier. Many online brokerage sites offer free information and education about learning how to invest the forex market. You can also train in real-life" trading without using any money. Its the online version of paper-trading. Youll be able to fine-tune your market strategies and analysis before you actually risk any of your own money.

As with any form of investment there is the potential for loss. Setting your stop points and minimizing your loss potential is not at all difficult, once you understand the forex lingo, and how currencies are traded.

Making money in forex trading occurs by buying and selling once currency for another. The trading is done in pairs. Quotes are displayed in the same manner. The money you make is determined by the change in pips.

Simply put forex (foreign exchange) trades are made according to the value of one currency as compared to another. These values of currencies are constantly changing. Quotes on prices are quoted in pips (percentage in point). If a particular currency quote goes higher, it means that currency is stronger. If it goes lower it means the currency weakening.

Learning to identify potential patterns and points of value changes in currencies is the basis for making money in forex trading. Theres lots of online help and education if you have an interest in the forex market. Youll also find you dont have to invest a large amount to begin to learn to trade. Some firms allow opening an account with as little as two hundred dollars. Plus, you get to practice before you make a trade with real money. What better way to learn and earn?

If you're getting started with forex trading or looking to learn more about forex trading, don't wait and click on over to