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Your FinanCial Guide For all SeaSonS • Vol. 22, No. 1

In ThIs Issue
Where Are the Safe Profits? .....................Page 2 The Credit Slice ...............Page 3 Euro Gets Nailed ............Page 4 Outlook and Strategy ......Page 6 The Total Return Portfolio ...........................Page 7 Christmas in Kennebunkport ...............Page 8 The Best Things in Life Are (Almost) Free ...................Page 9

Dear Friend,

January 2011

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gImme fIve
Is everybody happy? Investors should be. The old year handed us a marvelous chance to repair our portfolios some more after the hurricane damage of 2008. I’m confident the healing and restoration will carry forward into 2011. But there will be interruptions, and one may be in store now. During the first quarter, I expect a pullback of 4%–7% from the stock market’s most recent highs. Don’t dread it. The underlying “primary” bull trend has further to go. So any dip in the coming weeks will represent a buying opportunity. Give me a 5% drop, and I’ll be buying. Big time.

e’re putting another very good year behind us—and 2011 will likely make it three in a row! As I pen these words, the benchmark U.S. stock index (Standard & Poor’s 500) is up 11% for 2010, with dividends tacking on 2% more. Not half bad, especially when you recall how a grim Barron’s story last June, near the market’s bottom, was titled CALLING A BEAR A BEAR and warned that “claiming the stock market is merely correcting looks like an error.” In this month’s visit, we’ll take a calm, reasoned look at what the New Year may bring. Despite some obvious problems, the global economy and financial markets are in better shape than they were a year ago. In 2011, I think we’ll be able to pocket returns of 20% or more on our top-rated stocks, and perhaps only a tad less on our favorite bonds. Don’t barricade yourself in your bomb shelter just yet! One of my key themes right now is to earn a fat cash yield up front. President Obama’s tax compromise has significantly increased the appeal of dividend-rich stocks like the names on p. 2. Moreover, the legislative confusion over municipal bonds has created some eye-popping bargains in that sector. How many high-grade taxable bonds do you know of that are paying more than 10% in today’s world? Check out p. 4.

The World’s Best Bargains

Later, we’ll circle the globe for the New Year’s best opportunities (low risk, high return) in foreign stock markets. You may be surprised at the bargains I’m turning up—not only in creaky old Europe, where crisis headlines have understandably knocked prices down, but also in the fleetfooted “emerging” corners of the world. As a bonus, I’ll pinpoint one big market you should avoid at all costs. It’s an accident waiting to happen. First, though, let’s find out why the economic and financial landscape for 2011 still looks basically favorable—and how you can make the most of the remaining upside in the markets, while protecting yourself in case muggers jump out of the shadows.

The Road ahead
Quieter Markets Signal More Profits to Come in 2011
“Back to normalcy.” An obscure senator from Ohio rode to the White House on that slogan—and, in the New Year, it may be the winning formula for investors, too. Shunning the extremes of 2008 (down) and 2009 (up), financial markets are tiptoeing back toward the elusive middle. For 2010 (through mid-December), U.S. stocks performed just a few points north of their long-term average. Treasury-bond yields fell sharply from April to October, but then ticked back up to finish near their midpoint for the year. Even gold settled back into a more or less normal pattern. In 2010, the Midas metal continued its relentless 10-year bull run, touching a string
(continued)

Web site PIN for January: 1021

com). $28). stocks will rack up another 7%–11% return before running into stiff overhead resistance in the third or fourth quarter.of all-time highs. municipal bonds will post a much stronger performance than Treasuries as default fears subside. the dollar will strengthen as the U. Founding Member of the Newsletter Publishers Association of America. Coyle Marketing Manager: Jim Brinkhoff Subscriptions: $249 per year. We’ve got a bunch of them in our model portfolio. Band’s Profitable Investing® (ISSN 1048-3667) is published monthly by InvestorPlace Media. I’m also concerned that the Chinese economic “miracle” could start to unravel. Photocopying. 17601. Predictions are interesting. with gold reaching $1. While the information provided is based upon sources believed to be reliable.) Nonetheless. picking the right high-potential stocks will let you beat the indexes. Silver will experience a spike and reversal along the same lines as oil. such as Abbott Laboratories (NYSE: ABT. LLC.com PIN: 1021. economy holds relatively firm while the Asia-Pacific region.com . and may show slender price gains. below $32). (More on that. LLC. And of course. 5. InvestorPlace Media. though. Editor: Richard E. Phone: 800/211-8566 or 301/424-3700. • Gold and oil will push higher in the first half of the year. (Check p. bullion’s weekly and monthly swings narrowed substantially from the wild fluctuations we saw during the global crisis of 2008. Consequently. A package of these four should easily outleg the Dow in the New Year. MD. Food is one of life’s essentials. Vice President: Christopher Marett Group Publisher: Amy Long Senior Managing Editor: Billy Currano Business Manager: David Bishop Marketing Director: Christine Rothstein Editorial Assistant: Tamsen Eickhoff President: John J. raw materials (gold. Businesses have trimmed their costs to fit the new world we’re living in.) While economic growth will improve in 2011. led by China. but also carry the greatest risk of loss if you get your timing wrong. I believe the coming year will treat us to more of the same: generally positive returns for most asset classes. reproduction or quotation strictly prohibited without the written permission of the publisher. the Federal Reserve will stick to its near-zero rate policy until late in the year. if Washington can curb its spending habits and enact other confidence-boosting measures (like sunsetting Freddie and Fannie). why. nor can the publication be considered liable for the investment performance of any securities or strategies mentioned. capitalism has survived. Postmaster: Send address changes to Richard E.. from our political leaders in 2011. Pepsico (NYSE: PEP. It still rates a buy Richard E. Ultralow interest rates have given the financial system breathing room to earn back its losses. 9201 Corporate Blvd. $66) and Time Warner (NYSE: TWX. 6). Band Sr. I’ve got a new one for you below. Last month. I expect baby steps. I’m also adding a new name to the list. While it will probably take another three to five years for the wounds of 2008 to heal completely. and households have whittled down debt to much more manageable levels. cools off. Microsoft (NASDAQ: MSFT. but no crashes).S. But corporate and. © 2010 by InvestorPlace Media. buy below $54). I recognize that some serious risks will carry over from the old year into the new—such as the threat of a debt default by financially strapped European governments. Where are the Safe Profits? risks. 4 for my top muni recommendations.rband. with only the yellow metal logging a gain for the year. and at additional mailing offices.5% in December. rather than revolutionary changes. Periodicals postage rates paid at Rockville. we may even have a shot at something resembling a genuine recovery! especially. Yes—But Greater rewards To be honest with you. as always. In my judgment. with “normal” volatility (spurts and pullbacks. Here are my specific forecasts: • Blue chip U. Now.rband. Lancaster. • Treasury bonds will earn their coupon. and companies that produce ready-to-eat food tend to be among the most stable businesses out there. the weight of the evidence favors the bulls in the New Year. Please write or call if you have any questions. but their main use is to point us to markets where we can make good profits with an adequate degree of safety.rband. both gold and oil will end the year well off their highs. I continue to award top billing to stocks that pay generous—and rising—dividends. Subscribers should review the full disclaimer and securities holdings disclosure policy at www.600 an ounce and oil $110 a barrel.rband. What’s more. 2 Profitable Investing | January 2011 | www. Web site: www.html or call 800/219-8592 for a mailed copy. The S&P 500 will cross 1300 and may climb as far as 1350. Does that seem modest? You’ll be able to leverage your profits if you buy the market’s dips—one may be coming in January (see p. p. PA. I’ll leave any short-term trades in this area for my Richard’s Journal blog (www. Rockville. 700 Indian Springs Drive.com/disclosure. we want to own more and more stocks with this type of defensive characteristic. lifting the overnight rate by 25 basis points to 0. we purchased Kellogg (NYSE: K) for the Incredible Dividend Machine. its accuracy cannot be guaranteed. MD 20850-3334. In the second half. LLC. For the best combination of growth and safety. silver. E-mail: service@rband. As we head into the later stages of Wall Street’s bull market. oil) offer the biggest upside potential in 2011. And yet.S. with painful consequences for businesses that sell into China. Band’s Profitable Investing®.com.

annualized from the three most recent monthly distributions. you’re buying Gundlach’s expertise at judging credit quality—his ability to separate good mortgages from bad. Hebrew National franks. The world turns.8 years.20. It’s time to demand more yield. ➧ What to do now: For the model portfolio. I recommend a pair of no-load funds: • DoubleLine Total Return Bond Fund (DLTNX. a seasoned bond pro with a great track record. Based in Omaha. Ally Bank remains my favorite all-around CD provider. Think of your fixed-income portfolio as a pie with one big slice and two smaller ones. this no-load fund is currently invested almost entirely in mortgage paper.com) and Sallie Mae Bank (www. Current yield: 4. Healthy Choice and Marie Callender’s frozen entrees.com Mortgages and intermediate-term corporate IOUs are the basic ingredients that go into the credit slice. In recent years. approximately 60% of the total. the company has steadily lowered its risk profile—by selling its volatile commoditytrading business and paring debt. CAG perfectly jibes with our emphasis on earning as much of our payoff up front as possible. and now our Freddies maturing in December 2024—which we had tucked into Profitable Investing | January 2011 | www. smack dab in America’s breadbasket. In late 2009 and early 2010.ally. through mid-December. however.4%. Each fund will make up 4% of the portfolio. two institutions that consistently pay rates well above the national average. The Credit Slice Up with i ncome it’s oK to demand a Pay Hike The financial turmoil of the past few years has left retirees and other income investors shellshocked—so much so that many folks are still holed up in bank accounts and money market funds that yield next to nothing. 800/662-2739.at $50 or less. offering best-of-class yields all along the maturity spectrum (up to 2. FDX has returned 12%. Here’s what I advise. 7 for the new weightings. management has aggressively bought back stock and raised the dividend. See p. we purchased Freddie Mac step-up bonds with a going-in yield of 4%. CAG is known for a powerful lineup of consumer brands. Much more sedate than Jeff Gundlach’s fund. Peter Pan peanut butter. As part of this shift. so you can expect smaller shareprice fluctuations than with a long-term bond fund. 3 . Managed by Jeffrey Gundlach.1%. Pay up to $10. I’m targeting a share price of $26 within a year.000 minimum). we’re selling FedEx Corp. Meanwhile. The fund yields a handsome 8. We’re tracking the stock as one of our Growth & Income Plays. you’ll focus on high-quality credits to lessen your default risk. 877-354-6311. you must be willing to swallow a spoonful of either credit risk or maturity (interest rate) risk. Transport stocks like FDX are extremely sensitive to the pace of business activity.000). we’re opening a new category called Intermediate Credit Bonds to hold DLNTX and VFICX. though.com). where rate fluctuations markedly affect the resale value of your holdings. Now I’m slipping ConAgra (NYSE: CAG) into the main model portfolio. Year to date. To give you easy access. Average maturity stands at 6. Yielding a lip-smacking (and safe) 4. I suggest dividing the rest of your pie into two approximately equal slices. (NYSE: FDX). In the credit slice of the pie. Egg Beaters. Hunt’s tomato products. should consist of CDs and short-term bond funds— assets with a high degree of price stability. No initial minimum. 7). Orville Redenbacher’s popcorn. which had been cut in 2006 under a previous regime. I’ve encouraged you to shop for higher yields in various places. VFICX focuses on better-grade corporate bonds. making them vulnerable to even minor economic hiccups (to say nothing of recessions).4% at five years). without shouldering excessive risk. including Banquet.rband. Wesson oil. Wall Street has left crisis mode behind. In the long-term slice.7%. To capture the juicier yield. Each slice will let you earn a higher yield than you could on the big slice. • Vanguard Intermediate-Term Investment Grade (VFICX. and many more. In Profitable Investing. Pay up to $11.10. we’re moving 2% of the portfolio from World-Class Franchises to Growth and Income Plays. $2. ➧ What to do now: Buy CAG at $23 or less. the model portfolio—have been called for early redemption (at 100 cents on the dollar). We’ve bought CDs at Ally Bank (www. for a total return of more than 20% from here.salliemae. The big slice. you’ll emphasize intermediate maturities to limit your exposure to fluctuating interest rates. $3. To make room for ConAgra and give our model portfolio a slightly more defensive tilt. Essentially. for a total of 8% (see table on p.

I believe that. But this is too good a bargain for income investors to pass up. yet BAB enjoys a higher average credit quality. The United States. While I’m keenly aware of the budgetary challenges facing America’s state and local governments. a dollar-based investor today can buy some of Europe’s strongest business franchises well below the prices these stocks fetched in the spring of 2010. versus 11X for ExxonMobil (a company I love. Paris-based Total sells for only 8X estimated 2011 profits. I expect PHG’s operating profits to hit an all-time high—GE please copy! Furthermore. consumer electronics (such as flatscreen TVs). • Although the dollar has traded in an erratically rising pattern since mid-2008. Spain) have once again hammered the euro in recent weeks. a falling dollar pushes up foreign stock prices in dollar terms. Our cash reserve. in the great majority of cases. Current yield. I’m not generally excited about long-dated bonds. It’s paying 6. a $10. while GE’s dividend (even after the recent hike) remains 55% below its 2009 peak. When the books close on 2010. drops to zero.S.9%— more than Vanguard’s long-term corporate bond fund. For a U.1%. Currently. NQU uses leverage. Headquartered in Amsterdam. U. Buy at $13. In 2010. PHG manufactures advanced medical devices. by contrast. the equivalent—for a taxpayer in the top bracket—of a taxable bond yielding 10. we’re bumping up our weighting in Long-Term Bonds to 8% of the total. However. and the European Union less than 2%. now may be among the best of times to spread your wings beyond our borders. India’s about 8% and Brazil’s about 7%.rband. At barely 5X estimated 2011 cash flow (enterprise value divided by EBITDA). Philips is Europe’s answer to General Electric—without GE’s deadweight financialservices arm. the longer-term trend (dating back to 1971) points downward. the extraordinarily high yields now available on municipal bonds more than compensate for any ascertainable default risk. As a result. Ireland. stocks—in dollar terms—outran most foreign bourses in 2010.The long-Term Slice At today’s yields. Build America bonds (taxable munis) make the most sense for your IRA or other pension account. Philips never cut its payout during the recession and will likely sweeten it from 70 euro cents to 80 euro cents when the company declares its annual distribution next March. is estimated to have grown less than 3%. Exxon is no longer on the bargain rack). based on last year’s dividend: 3.S investor. so its share price can bounce around. Clearly. Portugal. I make an exception for one market sector: municipals. for three reasons: • Many businesses in the developed countries of the “old world” are selling more cheaply in their local stock markets than peers domiciled in the United States—despite equal or superior management quality and growth prospects. TOT also Profitable Investing | January 2011 | www.com . My top picks as we speak: • Philips Electronics (NYSE: PHG). meanwhile. 4 Our global strategy at Profitable Investing embraces developed as well as emerging markets. BAB represents our entire holding in this category. Despite all the hoo-hah about the death of the American economy. So why even bother to diversify overseas? Paradoxically. I’ve got news for you. and household appliances. euro Gets nailed ➧ What to do now: For the model portfolio. In the developed world.000 portfolio of stocks invested in the S&P 500 index would be worth almost 19% more (ignoring dividends) than a portfolio invested in the other developed nations of the world. I’m finding the best values right now in Europe. I’ll take a freebie like that any day! Among the traditional tax-exempt munis. In fact. lighting systems and components. A real cheapie among the world’s major oils. from 5% previously. GoinG Global investing Without Borders: Still a Smart idea Hey. the exchange-traded PowerShares Build America Bond Portfolio (NYSE: BAB) yields 5. the stock is quoted at a yawning 40% discount to its average valuation for the past five years. China’s real (inflation-adjusted) GDP grew about 10%.8%. with a focus on diagnostics.5%. • Total (NYSE: TOT). there’s huge growth potential for investors to tap into—as long as we place our bets in the right countries at the right price. I recommend the closed-end Nuveen Quality Income Municipal Fund (NYSE: NQU). • Emerging markets are growing much faster than their developed counterparts. since May 2008.50 or less. but let’s face it. where the debt woes of the so-called “peripheral” countries (Greece.

not exactly a new kid on the block. We’re tracking Total among our Growth & Income Plays. I prefer Brazil and India. one of the weakest performances among global bourses. is China. by all means. France withholds 25%. Chinese stocks listed in the United States fared better. China. To make room for Philips among our World-Class Franchises. of course. In 2010. paid in two semiannual installments. too many factories operating way below capacity. we’re moving ExxonMobil (NYSE: XOM) to our list of Niche Investments. Quite a comedown from 2009. Don’t let the opportunity slip through your fingers. Aqua America—a simple. but in reasonable amounts and with your eyes wide open! Exchange-traded funds continue to be my preferred way to play. leaped 29%. in the New Year. My advice: Stay away from ChinaProfitable Investing | January 2011 | www.rband. it’s important to keep our 5 . though. you can ride the emerging-markets wave for all it’s worth. fattened our wallets 19%. dull old water utility— soared 31%. We couldn’t be happier! At the same time. for example. Brazil would feel the impact. We’re tracking both in our main model portfolio. on the other hand. The locals. For both funds. May and November. I’m projecting a total return of 15% or more in the coming year. are running neck-and-neck with New York for 2010. The gorilla. only funds. Brazil. McDonald’s surged 27%. China. you can buy this one at an unusually low price.7% dividend. mainland Chinese investors drove the Shanghai index down almost 12% through December 17. And we’re celebrating! We’ve had some great winners in our model portfolio. though—including the 800-pound gorilla—will limp behind. I suspect. and most Chinese stocks. Oracle. emerging markets. Every inflation-wary investor should own some energy stocks.50 or less. Likewise. With PowerShares India Portfolio (NYSE: PIN) and iShares MSCI Brazil Index Fund (NYSE: EWZ). the two big emerging markets with the healthiest (youngest) long-term demographic profiles. including reinvested dividends. strong economic growth rates should enable certain emerging markets to pull comfortably ahead of the developed world. If the Chinese economic machine were to sputter. 1040. and TOT at $55 or less. but I wouldn’t add to my stake unless the share price drops to $67 or less. and EWZ at $75 or less. but only if you hold the stock in a taxable account (not an IRA). I’m projecting a total return of more than 20% for both stocks in the next 12 months. will by 2032 have almost the same percentage of people over 65 as the United States. Our Midcap Spyders jumped 25%.S.5%— nearly tripled the return of the S&P 500. which rolled up an average return of more than 30% (through mid-December). an emerging dud As we go to press. but still lagged the Dow and the S&P 500.com For new money. sends 15% of its exports— mainly raw materials—to China. starting with our three master limited partnerships. India’s government is running a massive budget deficit. Remember. You can recover this tax via a credit on your U. ➧ What to do now: Buy PIN at $24. Thanks to the depressed euro. XOM is still worth holding if you own it.serves up a plump 5. total RetURn poRtfolio Beware the Bidding War After a fine year like 2010. Why the cooling off? Mainly. are growing uneasy with China’s wildly unbalanced economy—too much construction. while spreading your bets—for safety—among dozens of individual companies. shareholders. it’s only natural for investors to want to celebrate. Invest. Tax tip: The Dutch government imposes a 15% withholding tax on dividends paid to U. Government Properties Income Trust. President Obama’s landlord. when the MSCI Emerging Markets Index—up a staggering 78. virtually the same (in proportion to the country’s output of goods and services) as our own. as a group. it’s because the 2009 monster rally erased much of the valuation discount that investors had demanded of emergingmarkets stocks during the financial crisis. For the New Year. that even the most dynamic emerging markets carry risks as well as rewards. I think. Prices reverted to normal (that same old song again!).S. Younger and Healthier ➧ What to do now: Buy PHG at $32 or less. Other EMs.

wits about us as we forge ahead into 2011. Mr. For now. As a closed-end fund. one of the most successful business franchises of the past decade (or any decade). The contagion is also spreading to Europe. thank you. AGL yields 4. with a lower default rate and a higher recovery rate (in cases where loans have defaulted).3%. let’s count our 2010 profits. though. (continued on p. according to my calculations. I expect yields to crest during the first quarter and then to ease modestly into midyear. the stock has climbed too rapidly in recent months to merit new buying at these levels. as well as the exchangetraded PowerShares Water Resources Portfolio (NYSE: PHO). With the herd rushing into cyclicals. intoxicated perhaps by the president’s “compromise” (collapse) on taxes. hold it. AGL will replace Verizon (NYSE: VZ) in the Machine.) The unusually high yield stems from leverage—borrowed money.rband.9%. If you own Verizon. • Fixed income (40%). Bond prices have gotten slammed since early October as investors picked up the scent of an improving economy. Thus.com . have launched a bidding war to see who can predict the biggest stock market spike in the New Year. starting with a likely increase in February 2011. The deal should add modestly to AGL’s earnings in the second year. 8) Profitable Investing | January 2011 | www. Market may soon give you a good opportunity to dip your toe in. In the utility space. until FSIC seeks a listing on an organized stock exchange.2%. in condensed form. a financially sound gas ute serving suburban Chicago. Surging mortgage rates have already begun to crush the fledgling recovery in housing. FSIC yields 7. income investors might earmark a parcel of cash to FS Investment Corp. I recommend selling volatile stocks that appear to be “pricing in” a rip-roaring economic expansion in the New Year (which probably won’t occur). of course. Currently. In addition. I would sell cyclicals Dow Chemical (NYSE: DOW). For the coming year. you should plan to hold for at least five years to seven years. Some Wall Street strategists. nor will there be an active secondary market for you to sell into. if you’ve never owned McDonald’s (NYSE: MCD). On the buy side. Franklin Square/ GSO Blackstone. so they’re now probably about as low as they’ll go in the current cycle. This newly organized businessdevelopment company invests in “senior” bank loans—loans secured by a lien on the corporate borrower’s assets. but take a smaller position in intermediate and long-term bonds along the lines I suggested on p. 3–4. Put/call ratios have plummeted. Pay up to $37. In particular.3% in recent sessions. outlook and Strategy Here. Now. However. Based 6 in Atlanta. MCD has easily beaten the market indexes for the past five years (and longer). At the current offering price of $10. I’ll watch that game from the sidelines. I project MCD will deliver a total return in the mid-teens. From our Niche list. the manager. fewer and fewer individual stocks are following the indexes to new 52-week highs—a worrisome divergence.90. I look for the dividend to grow at a 3%–4% pace over the next five years. is my outlook and strategy for the model portfolio: • Stocks (60% of the total) have mounted a dazzling rally off the summer lows. it appears the pendulum has swung too far. we’ll continue to track VZ as a Standby member of the Machine.40 per share. All have less than 5% appreciation potential remaining in the year ahead. indicating way too much optimism among the market’s crapshooters. where rising bond yields are making it more difficult for financially strapped governments to sell their debt. (Monthly distributions. AGL has just made a takeover bid for NICOR (NYSE: GAS). Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). I’m promoting gas distributor AGL Resources (NYSE: AGL) from the Niche Portfolio to our Incredible Dividend Machine. with the benchmark 10-year Treasury yield topping 3. celebrate them—and protect them. Strategy: Use any lingering market strength just before or after the turn of the year to prune stocks and mutual funds that carry too much risk or offer too little reward in 2011. sports a considerably better long-term record than most of its peers. whose judgment tends to be notoriously wrong at important turning points. FSIC doesn’t ordinarily redeem its shares. if conditions warrant. Take advantage of the crowd’s shortsightedness and snap up a few shares at $77 or less. Strategy: Keep most of your fixed-income stash in short maturities. As an alternative to the intermediate-term bond funds highlighted earlier. but now look overdue for a significant pullback (at least 4%–7%). Rates on the loans are tied to short-term bank funding costs. some impetuous investors have decided to dump their “boring” consumer-staples stocks—even though. Current yield: 3. There will be plenty of time to lift our forecast later in the year.

with attractive yield for income seekers We’re lowering buy limit to reflect tighter generating profit margins Building solar plant in Calif.7% yield on mortgages selected by world-class money manager Emphasizes better-grade corporates. please see the online portfolio.ToT a l R e T u R n P oR T f o l I o Stocks (60%) Accenture Bank of New York Mellon Baxter International ExxonMobil HHHH Hewlett-Packard IBM HHHH J. a good blend with riskier DLTNX Higher yield than corporates. increased 38 yrs in a row Dividend yield twice the S&P 500 index.50 1. current pre-tax yield 7% Emerging Markets (4%) iShares MSCI Brazil Index PowerShares India Portfolio 75 24. cost cuts yield bigger than expected Q3 profit margins Yield now too low. Profitable Investing | January 2011 | www. but respect our buy limit to keep your risk low Has paid uninterrupted dividends since 1924. making it 41 annual increases in a row Currently quoted at a 25% discount to its median P/E of past 10 years Price hikes. up from 5%) HHHH PowerShares Build America Bond Portfolio NYSE: BAB Note: For Mutual Fund Alternatives. 2011 net) makes co. down from 23%) Buy Below Comments Dec. we’re moving to Niche status to make room for Philips (see p. thanks to gov’t tenants (94% of rents) Pullback creating another buying opportunity in top global brand Surge in Swiss franc has inflated share price. buy dip only Dec. wait for pullback to buy Russian dairy deal unexciting.10 10.50 54 23 26 77 52 66 63 29 55 29 62 42 75 152 20 27 73 53 47 73 Growth & Income Plays (15%. observe limit 6. RWE Fixed Income (40%) Raise Your Rate CD (15%) Ally Bank. but we like PEP’s dividend and safety Earnings growth should get back on track with March 2011 quarter Latest dividend sweetened 4%. HHHH Entergy HHHH NextEra Energy PG&E Corp. a tempting takeover target GOP sweep of House diminishes odds of steep cuts in defense spending Latest Harry Potter hit (“Deathly Hallows”) headed for $1bn box office Touched our buy price three times in Nov-Dec and will soon do it again Big upside potential. watch blog for possible sell Dividend boost coming soon. a valuable defensive attribute Safest publicly listed REIT. PA 866/247-2559 877/346-2756 ----11. we may pare holding soon Stock now pricey on year-ahead earnings. shows directors bullish on 2011 Hold. Morgan Chase Microsoft News Corp. robust for a utility Dividend safe for coming year at least. buy on pullback only Midcaps now very expensive vs. stock is too cheap at 8X forward earnings Rising 2011 earnings estimates prompt us to nudge up our buy limit Don’t chase. UT Intermediate Credit Bonds (8%. due to share appreciation. with option to raise your rate once during term Generous (by today’s standards) 1. wait for pullback to buy Ultra-strong balance sheet. price spike leaves stock overvalued. but don’t get carried away. pristine balance sheet: an all-weather holding Fee-based online newspaper content is working at WSJ. Novartis Occidental Petroleum Oracle Quest Diagnostics HHHH Raytheon HHHH Time Warner HHHH = best buy at 12/17 closing prices NYSE: ACN NYSE: BK NYSE: BAX NYSE: XOM NYSE: HPQ NYSE: IBM NYSE: JPM NASDAQ: MSFT NYSE: NWSA NYSE: NVS NYSE: OXY NASDAQ: ORCL NYSE: DGX NYSE: RTN NYSE: TWX NYSE: EWZ NYSE: PIN 44 29 51 -45 134 44 28 15 56 85 27 52 47 32 World-Class Franchises (21%. due to share appreciation. London Times Healthier pipeline of medicines nearing FDA approval than most rivals Stock now within a whisker of all-time (May 2008) high. up from 13%) NYSE: ABT HHHH Abbott Laboratories HHHH ConAgra NYSE: CAG Government Properties Income Trust NYSE: GOV NYSE: MCD Nestle OTC: NSRGY Pepsico NYSE: PEP Procter & Gamble NYSE: PG Sysco NYSE: SYY HHHH Total NYSE: TOT Unilever NYSE: UL HHHH McDonald’s Master Limited Partnerships (5%) Buckeye Partners Enterprise Products Partners ONEOK Partners NYSE: BPL NYSE: EPD NYSE: OKS NYSE: MDY NYSE: WTR NYSE: DPL NYSE: ETR NYSE: NEE NYSE: PCG OTC: RWEOY Mighty Midcaps (5%) Midcap Spyders Aqua America Utilities (10%) HHHH DPL Inc. with FDIC-insured safety Lofty 8.P. new position) HHHH DoubleLine Total Return Bond MF: DLTNX HHHH Vanguard Interm.56% going-in yield. payable Jan. 5) Despite dilutive takeovers.20 25. large caps.com 7 . buy on pullback only Back in our buy range. desert big enough to power 75.9% dividend hike. 4. Investment Grade MF: VFICX Long-Term Bonds (8%. fears of bloated muni supply overdone One-Year Bank CDs (9%) Sallie Mae Bank. price spike leaves stock overvalued.000 homes Should report 8%–9% earnings growth in 2011.rband. thanks to big secondary offering (share glut) Yield now too low. coming dividend increase may be smaller than expected Dominant market share. watch blog for possible sell Low valuation (12X est.3% yield.

2. PowerShares india Portfolio (NYSE: PIN) at $24. This month. BuY doubleline Total return Bond Fund (DLTNX. After gorging ourselves on a seafood dinner by a roaring fire. (800/899-8779). bring you joy and peace—even if “the weather outside is frightful. And then the climax of the day.10 or less.” My hands are chilled at the keyboard. let it snow. and I’ve got to run upstairs to warm my mug of peppermint tea. so I’ll sign off. 6) summaRy 1. 800/662-2739) at $10. just after two o’clock. Calif. Yours for Profitable Investing. take advantage of the recent back-up in bond yields to build a meaningful stake in DoubleLine Total Return Bond Fund. 4. all you good folks who live in sunny climes where Christmas is celebrated amid palm trees and soft breezes. fsinvestmentcorp. 877-354-6311) at $11. Forbes. barrelchested and merry—at the dock. the decorations. For literature. The scaremongers will be proved wrong about bonds! Finally. Santa Claus arrived. including eight in the “Best Financial Advisory” category by The Specialized Information Publishers Foundation.com. there’s something special about bundling up in your warmest coat and cap and mittens. and the true meaning of the season. subsequently updated). In the developed markets. For the income sector of your holdings. click on www. The Wall Street Journal and other leading publications. Sell volatile stocks like FedEx and buy steady performers like ConAgra. we ventured out into the frigid coastal air to take in the town—the shops. don’t overlook the benefits of global diversification.50 or less.S. That may be more like the original setting of the story. call Bob Condon or Jerry Kohn at Foundation Investment Group in Berkeley.50 or less. and iShares MSCi Brazil index Fund (NYSE: EWZ) at $75 or less. the snow held off. as well as Niche Investments dow Chemical (NYSE: DOW). welldefined bet on the explosive growth of emerging markets. BuY Philips electronics (NYSE: PHG) at $32 or less. Total (NYSE: TOT) at $55 or less.50 or less. . with our exchange-traded India and Brazil funds. But I must say. actions to Take This month Minimum to open an account: $5. Will I be seeing you at the World MoneyShow in Orlando (February 9–12)? I’m working on two special presentations. when Enid and I joined our daughter Georgina and her family for the annual Christmas Prelude in Kennebunkport. a couple of Sundays afternoons ago. Home depot (NYSE: HD).” You won’t want to miss them! For free tickets. while taking far less risk than the popular stock indexes. and a popular speaker at investment conferences. BuY Conagra (NYSE: CAG) at $23 or less. the lights. lowe’s (NYSE: LOW) and PowerShares Water resources Portfolio (NYSE: PHO). though.20 or less.(continued from p. To the delight of our grandchildren Louisa and Tommy. on a lobster boat! Where else on Earth but in ice-bound Maine? I don’t know where you were planning to spend the holidays. Sell Fedex Corp. His Total Return Portfolio has nearly quadrupled investors’ money since inception in 1990. 5. it’s a place where the warmth of friends and family. and Vanguard intermediateTerm investment Grade Fund (VFICX. and singing out to defy the elements: “Let it snow. Band P. Maine. Band’s straightforward style and safety-first “value” approach have won numerous awards. Band has appeared on CNBC and been quoted in Barron’s. Philips and Total give you ample dividends and more appreciation potential than their stateside peers. Vanguard Intermediate-Term Investment Grade Fund and PowerShares Build America Bond Fund. He is the author of Contrary Investing (named “Best Investment Book” of 1985. 3. you can make a cautious. let it snow!” Happily. Richard E.000.moneyshow. Meanwhile. one final thoUGht Christmas in Kennebunkport I’m sorry. I hope. BuY PowerShares Build america Bond Portfolio (NYSE: BAB) for the model at $25. Band is the newsletter world’s #1 authority on investing for low-risk growth. align your portfolio for double-digit profits in the New Year with as little risk as possible. You can also view a prospectus at www. about dividend investing and “The Coming Demographic Tsunami. riCHard e. the carolers. (NYSE: FDX) from the model portfolio. Upper-bracket taxpayers can buy nuveen Quality income Municipal Fund (NYSE: NQU) instead at $13. com/twms or call 800/970-4355 and mention code 020478.

We decided to bid for a three-star room on As you get into the habit of shopping for bargains. you can negotiate a lower price by presenting a counteroffer directly to the seller. Often. even if some of them insist on telling us (a little self-importantly) that the true motive for their penny-pinching is “to make the world a better place. Savings—the difference between what you take in and what you spend—are the indispensable raw material for building wealth. I love Internet sites like Priceline and eBay for this purpose. directv. though. It’s not about changing the world. During the bubble years (roughly 1995–2005). It’s a technique that works as long as the asset you borrowed against (your house. or your stock portfolio) keeps rising faster than your cost of carry. But I’m glad to welcome the newcomers aboard anyway. I’ve been advocating a cost-conscious. New? There’s nothing really new about it. Let’s not kid ourselves. a lot of Americans fell for the widely trumpeted deception that you can borrow your way to riches. because you’ll catch a vision of what your newfound savings can do for you over the longer pull. for a moment. Of course.com 9 . with facts to back you up—particularly if you’re requesting a discount from a licensed professional (doctor. say. it’s about changing your world—your future. suburbs. Then stretch your goal. (continued) Supplement to Profitable Investing | January 2011 | www.” Train yourself to be a discount shopper so that more of your income stays in your own pocket to invest and grow. but at a significant discount to the “manufacturer’s list price. lawyer. Half-jokingly.). You’ll discover that some toys you thought were a must-have right now—you can do without. Priceline. nothing more. with stronger long-term growth prospects. And because of it. your profits begin to melt—and the debt remains. that Americans can help make the world a better place in the years ahead by learning to save more and borrow less. But you don’t have to face that heartbreak.Profitable Investing Special u p p l e S p e c i a l S Supplement m e n t Your Financial Guide For all SeaSonS • Special Supplement ® January 2011 Money SenSe the Best things in life are (almost) Free I chuckle sometimes when I hear the media touting what they call the New Frugality. however. In my writings. pay down your credit cards and other high-cost debt until you’re saving at least 10% of your income.” I don’t doubt. odds are you’ll walk away with a lower bill. Enid and I were looking for a hotel room in the Washington. I made that decision long ago. you may find it isn’t even necessary to change vendors. is so that you (and those you love) can enjoy the abundance of things you want to have and do later on. In some cases. Recently. The main reason for bringing your expenses into line with your income. Let’s talk about how you can do the same.com). raw material for Wealth discount Shopping The first step is to recognize that many of the things you buy and use every day are available. Here’s the key: Treat every price as an asking price. you should always make your argument politely. I offered $89—the same price a nearby Red Roof Inn was asking. it’s possible to substitute a lower-cost product for a higher with no loss of quality. As soon as the market goes into reverse. Cable company squeezing you? Switch to satellite (www. Set a goal to spend no more than 90% of what you earn (even if you’re retired). We got the Marriott for 89 smackers. In fact. at least for a while.C. here and now. as you’re able. perhaps not totally free. really.com). You’re crunched.geico. Car insurance costs too much? Take your business to Geico (www. You can repeat this process in many different settings. And you won’t even miss them. I’m financially independent today. CPA. A tony Marriott was charging $299 a night if you booked on the hotel’s Web site.rband. Merely threatening to do so will prompt your existing provider to grant you a concession. more stable global economy. an interesting thing will happen. D. high-savings lifestyle for more than 30 years. It’s the only way to go. To supplement your discount shopping. if we want all God’s children to live in a sounder. etc. But if the person on the other side of the table understands you’re serious..

I’m a strong believer in discount brokerage and no-load mutual funds. In December. CEL will have to take a charge Supplement to Profitable Investing | January 2011 | www. I mean hunting for.com . Be a frugal investor. with their top-heavy fee structures. we’ve got an even stronger reason to pounce. I recommended a non-publiclytraded REIT. don’t forget the magnificent. In 20 years.rband. While that’s a drop in the bucket for a guy whose net worth reportedly exceeds $2 billion. and you invest it at a modest 5% return. and insisting upon.P. your kitty will add up to 258% of your annual salary. And this leverage costs you nothing. world-class stuff.) Don’t let artificial obstacles stop you from harnessing the awesome power of compounding wealth. it will be worth 678% of your salary—even without any pay increases. Your wealth will explode! Let’s assume you save 20 cents of every dollar you earn. If saving comes hard to you. purchased $4 million of PIMCO closed-end muni funds for his personal account. Carey & Co. And that’s without any change in the value of the underlying real estate. you automatically enlarge any profits you make as the investment rises to fair value. probably the world’s greatest living bond investor. the REIT’s sponsor. annoying customers and sparking a rash of lawsuits. except persistence and patience. unless the broker is adding real value (such as tax or retirement advice). closed-end funds selling at a discount to net asset value. So indeed.fidelity.Special Supplement to 15%.com). Better yet. You’re reaping a windfall because you bought at a discount. As you know from past newsletters. CEL’s system malfunctioned for a few hours. and I heartily recommend it. wants to merge CPA 14 into another REIT in the CPA series. discounts of all kinds: stocks selling at a deep discount to historical norms. Variable life insurance and variable annuities? Except for a couple of low-cost products offered by Fidelity and Vanguard. The best things in life are free! Short BitS and Follow-UpS the Joys of Free leverage Finally. as you like. far superior to the rinky-dink stock reports spewed out by most other discounters. or cash. you can place up to 30 free trades per month through BofA’s MerrillEdge program for self-directed investors (www. I recommend taking the stock. So are brokers’ wrap accounts. When you buy at a discount. I recently opened a MerrillEdge account myself. Now comes word that W.com). Bill Gross of PIMCO. Hedge funds. the Frugal investor There’s one more thing you can do to accelerate. Sign up for your employer’s 401(k) plan. dramatically.000. if you’re a Bank of America customer with a balance of at least $25. Furthermore. Corporate Property Associates 14. This is the type of short-lived controversy that can tends to pry stock out of “weak hands”— traders whose line of vision ends with the next quarterly earnings release. I’ll pay a full-service broker’s commission. Among the big-name discount brokers. In rare cases. Keep buying Nuveen Quality Income Municipal Fund (NYSE: NQU) at $13.com). But if you take the cash. free leverage at your disposal as a 10 • We’re not the only folks buying municipal bonds these days. but only for an outstanding product unavailable elsewhere.95 flat rate on stock orders (800/343-3548 or www. I don’t mean borrowing money. Don’t overpay. Undoubtedly. Arrange to have a fixed dollar amount transferred each month from your checking account to your investment program. I suggest making it automatic. At the time. we were able to buy CPA 14 at a doubledigit discount to the appraised value of the trust’s properties. customers get access to Merrill Lynch research. I figure you’ll notch a total return—dividends plus capital gains—of about 26% in seven months. when choosing investments. bargain buyer. Within a decade. either for investment-related services or for the investments themselves.. (Many mutual funds offer this option.rband. • Cellcom Israel (NYSE: CEL) is ringing up a buy signal. shares of Israel’s largest wireless provider have since dipped below our buy target several times. the old saying proves right again. it’s a vote of confidence nonetheless. First written up in our November issue. are off limits. 20% or more. real estate at a discount to appraisal. in my online Richard’s Journal (www. The trading platform is clearly laid out and easy to use. Back in August. But now. unless you have an immediate need for the cash. Fidelity deserves mention for its low $7. You can take the new stock. your wealth accumulation.merrilledge.50 or less. On December 1. fuhgedaboudit! Operating expenses are too high for today’s returns.

the market now appears vulnerable to a 4%–7% “correction. For new money. good till canceled. Accelerate your buying program if the Standard & Poor’s 500 index falls more than 5% from its most recent closing high (1243). Fidelity.com 11 . tilting the value proposition back toward bonds. On the stock side. However.) I’m also tacking on 4% to PIMCO Total Return Fund. we’re dialing back our risk by trimming 3% from Perkins Midcap Value and 2% from Marsico Growth. 40% fixed income. so I’m pouring our cash reserve into Vanguard Intermediate-Term Investment Grade. Among our fixed-income holdings. Since our last review two months ago. Among the stock funds. It’s composed of funds you can purchase through leading discount brokers (Schwab. However. Rowe Price portfolios’ cash reserve (formerly 6%) into the two multistrategy bond funds. e*Trade. we’re holding the overall allocation of the Fund Supermarket Portfolio steady at 60% stock funds. Rowe Price or Vanguard. bond prices have dropped sharply. as closely as possible. Our Fund Supermarket Portfolio makes the nearest match. Through midDecember. 3 of the main issue for my comments about Double Line. For best results. start with these funds. for a yield of just over 8% at the current share price.). (continued) Supplement to Profitable Investing | January 2011 | www. we’re shifting the Fidelity and T.) This month. the flagship of “bond king” Bill Gross. I provide All in the Family Portfolios with funds drawn from Fidelity. Rowe Price Spectrum Income. After that. I’m now much less concerned about a backup in bond yields—the bulk of the move has already occurred. (See boxes below. I’ve designed these fund portfolios to mimic.70 in 2011. we’re leaving the basic stock/fixed income allocation of our All in the Family portfolios unchanged from our last review in November. I suggest dribbling money into GABEX in two or three installments over the next month or so. If you’re on a limited budget this month. I estimate CEL will pay total dividends of about $2. bringing that fund up to a 5% weighting. a superb performance for a conservative fund that concentrates on dividend-paying stocks. though. As a rule. TD Ameritrade. We’ll switch the proceeds to Gabelli Equity Income (GABEX). etc. I award pride of place to DLTNX and PTTDX. I favor funds available with no transaction fee. However. my preferred vehicle for fresh cash is GABEX. in keeping with the posture of the main Profitable Investing model portfolio. the performance of the stocks and bonds in our main Total Return Portfolio. Portfolio weightings after this month’s changes line up as follows: Fund Supermarket portfolio 21% Weitz Short-Intermediate Income Fund (WEFIX) 20% Gabelli Equity Income (GABEX) 15% FMI Large Cap (FMIHX) 14% PIMCO Total Return (PTTDX) 10% Perkins Midcap Value (JMCVX) 6% Artio (Julius Baer) International II (JETAX) 5% DoubleLine Total Return Bond (DLTNX) 5% Marsico Growth (MGRIX) 4% Acadian Emerging Markets (AEMGX) “all in tHe FamilY” Fund portFolioS As with the Fund Supermarket Portfolio. although I occasionally make exceptions when I find a fund with a unique strategy or performance record. I’m making a couple of adjustments. For loyalists who prefer to deal with a single fund group. to buy at $33 or less. (See p. Vanguard doesn’t offer a multistrategy fund.rband. place a limit order with your broker. Cash goes to zero.Special Supplement against Q4 profits for the service disruption. GABEX has gained 15% for 2010. Fidelity Strategic Income and T.” Accordingly. T. we’re adding 2% to DoubleLine Total Return Bond. Our Hassle-Free ETF Portfolio caters to fans of low-cost exchange-traded index funds. the company’s earnings will march forward again. Accordingly. model mutual Fund portFolioS Sit back and let your investments do the heavy lifting! Our model fund portfolios make it a cinch to follow our safety-first Profitable Investing strategy.

After this month’s changes. rowe price (800/638-5660) 21% 20% 19% 13% 12% 6% 5% 4% Intermed. I’m eliminating our 1% cash reserve and shifting 2% of the portfolio from short-term bonds (iShares Barclays 1–3 Year Credit Bond Fund). dictates that we take some defensive measures. I’m swapping 2% from Value Index and 3% from Growth Index into Equity Income. thanks to its generous yield and potential for capital gains as the supply glut in the municipal market eases after the turn of the year. that we’re bolstering our stake in PowerShares Build America Bond Portfolio (BAB) by 3%.-Trm. Rowe Price portfolio. I repeat my caution that a market pullback seems likely in January. the market’s extremely overbought condition. the contrarian inside me is whispering that the bond market could hand us some nifty trading profits in 2011.rband. To accomplish this objective. FEQIX is by no means my favorite fund for dividend seekers. the ETF portfolio is holding steady at 60% in stock funds. Inv. 40% in fixed income. I recommend substituting Gabelli Equity Income (see Fund Supermarket Portfolio) instead. It stands to reason that the equity-income funds in each group deserve top priority for your new stock money this month.com . but it’s the best Fidelity has to offer. On the equity side. After a sizzling run in 2010 (IJS was up nearly 23% through mid-December). Portfolio weightings. With trader sentiment on bonds now languishing at an 18-month low. in the Vanguard portfolio. If you’ve got a brokerage account with Fidelity. Rowe Price organization’s chairman). Simultaneously. 6 of the main issue. small caps are expensive by most historical yardsticks. Grade Value Index Growth Index Global Equity Midcap Value Index Emerging Markets Index Vanguard (800/662-2739) 21% 20% 19% 13% 12% 6% 5% 4% HaSSle-Free etF portFolio In line with our main Total Return Portfolio. Spread your purchases over two or three installments. Grade Equity Income Short-Trm. In the T. Finally. Over on the stock side. however. Take your profits and toast your good fortune! While DTD is my top buy this month among our stock funds. T. we’re padding our safety cushion by adding 5% to WisdomTree Total Dividend Fund (NYSE: DTD). (Current yield: 2. Bear in mind. I’m trimming 2% from Contrafund and 3% from Blue Chip Growth. our highest-yielding stock fund. I’m closing out our 5% stake in iShares S&P SmallCap 600 Value Index Fund (NYSE: IJS). Inv.Special Supplement These three funds are my top buys for new money this month.50. In the Fidelity portfolio. I’m switching 2% from Value and 3% from Growth Stock to Equity Income. Pay up to $25. while adding the proceeds to Equity Income (FEQIX). that I expect a pullback in the weeks immediately ahead. Rowe Price Equity Income (PRFDX) has turned in an outstanding performance for the past quarter-century under portfolio manager Brian Rogers (who now serves as the T. Note. break down as follows: Fidelity (800/544-8888) Strategic Income Equity Income Short-Term Bond Contrafund Blue Chip Growth Worldwide Midcap Value Emerging Markets 21% 20% 19% 15% 10% 6% 5% 4% Spectrum Income Equity Income Short-Term Bond Value Growth Stock Global Stock Midcap Value Emerging Markets t. weightings for the ETF portfolio shape up as follows: 17% iShares Barclays 1-3 Year Credit Bond Fund (NYSE: CSJ) 15% iShares Russell 1000 Growth Index Fund (NYSE: IWF) 15% iShares Russell 1000 Value Index Fund (NYSE: IWD) 15% iShares Barclays Intermediate Credit Bond Fund (NYSE: CIU) 15% WisdomTree Total Dividend Fund (NYSE: DTD) 8% PowerShares Build America Bond Fund (NYSE: BAB) 6% iShares MSCI EAFE Index Fund (NYSE: EFA) 5% Midcap Spyders (ASE: MDY) 4% iSharesMSCI BRIC Index (NYSE: BKF) 12 Supplement to Profitable Investing | January 2011 | www.8%). though. BAB is your top bond buy this month. after this month’s changes. Unlike its Fidelity rival. alongside the technical weaknesses I pointed out on p. Buy in two or three stages over the coming month or so.