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A 2 0 war Fi na 1 0 S ded nc ial I P F Ad vis o

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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

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. Im 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 markets most recent highs. Dont 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 Ill be buying. Big time.

ere putting another very good year behind usand 2011 will likely make it three in a row! As I pen these words, the benchmark U.S. stock index (Standard & Poors 500) is up 11% for 2010, with dividends tacking on 2% more. Not half bad, especially when you recall how a grim Barrons story last June, near the markets bottom, was titled CALLING A BEAR A BEAR and warned that claiming the stock market is merely correcting looks like an error. In this months visit, well 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 well be able to pocket returns of 20% or more on our top-rated stocks, and perhaps only a tad less on our favorite bonds. Dont 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 Obamas 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 todays world? Check out p. 4.

The Worlds Best Bargains

Later, well circle the globe for the New Years best opportunities (low risk, high return) in foreign stock markets. You may be surprised at the bargains Im turning upnot 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, Ill pinpoint one big market you should avoid at all costs. Its an accident waiting to happen. First, though, lets find out why the economic and financial landscape for 2011 still looks basically favorableand 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 sloganand, 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

of all-time highs. And yet, bullions weekly and monthly swings narrowed substantially from the wild fluctuations we saw during the global crisis of 2008. I believe the coming year will treat us to more of the same: generally positive returns for most asset classes, with normal volatility (spurts and pullbacks, but no crashes). While it will probably take another three to five years for the wounds of 2008 to heal completely, capitalism has survived. Businesses have trimmed their costs to fit the new world were living in, and households have whittled down debt to much more manageable levels. Ultralow interest rates have given the financial system breathing room to earn back its losses. Now, if Washington can curb its spending habits and enact other confidence-boosting measures (like sunsetting Freddie and Fannie), why, we may even have a shot at something resembling a genuine recovery!

especially, municipal bonds will post a much stronger performance than Treasuries as default fears subside. (Check p. 4 for my top muni recommendations.) While economic growth will improve in 2011, the Federal Reserve will stick to its near-zero rate policy until late in the year, lifting the overnight rate by 25 basis points to 0.5% in December. Gold and oil will push higher in the first half of the year, with gold reaching $1,600 an ounce and oil $110 a barrel. In the second half, though, the dollar will strengthen as the U.S. economy holds relatively firm while the Asia-Pacific region, led by China, cools off. Consequently, both gold and oil will end the year well off their highs, with only the yellow metal logging a gain for the year. Silver will experience a spike and reversal along the same lines as oil.

Where are the Safe Profits?

risks, YesBut Greater rewards

To be honest with you, I expect baby steps, rather than revolutionary changes, from our political leaders in 2011. Whats more, I recognize that some serious risks will carry over from the old year into the newsuch as the threat of a debt default by financially strapped European governments. Im also concerned that the Chinese economic miracle could start to unravel, with painful consequences for businesses that sell into China. (More on that, p. 5.) Nonetheless, the weight of the evidence favors the bulls in the New Year. Here are my specific forecasts: Blue chip U.S. stocks will rack up another 7%11% return before running into stiff overhead resistance in the third or fourth quarter. The S&P 500 will cross 1300 and may climb as far as 1350. Does that seem modest? Youll be able to leverage your profits if you buy the markets dipsone may be coming in January (see p. 6). And of course, as always, picking the right high-potential stocks will let you beat the indexes; Ive got a new one for you below. Treasury bonds will earn their coupon, and may show slender price gains. But corporate and,

Predictions are interesting, but their main use is to point us to markets where we can make good profits with an adequate degree of safety. In my judgment, raw materials (gold, silver, oil) offer the biggest upside potential in 2011, but also carry the greatest risk of loss if you get your timing wrong. Ill leave any short-term trades in this area for my Richards Journal blog (www.rband.com). For the best combination of growth and safety, I continue to award top billing to stocks that pay generousand risingdividends. Weve got a bunch of them in our model portfolio, such as Abbott Laboratories (NYSE: ABT, buy below $54), Microsoft (NASDAQ: MSFT, $28), Pepsico (NYSE: PEP, $66) and Time Warner (NYSE: TWX, below $32). A package of these four should easily outleg the Dow in the New Year. Im also adding a new name to the list. Food is one of lifes essentials, and companies that produce ready-to-eat food tend to be among the most stable businesses out there. As we head into the later stages of Wall Streets bull market, we want to own more and more stocks with this type of defensive characteristic. Last month, we purchased Kellogg (NYSE: K) for the Incredible Dividend Machine. It still rates a buy

Richard E. Bands Profitable Investing (ISSN 1048-3667) is published monthly by InvestorPlace Media, LLC, 9201 Corporate Blvd., Rockville, MD 20850-3334. Please write or call if you have any questions. Phone: 800/211-8566 or 301/424-3700. E-mail: service@rband.com. Web site: www.rband.com PIN: 1021. Editor: Richard E. Band Sr. 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. Coyle Marketing Manager: Jim Brinkhoff Subscriptions: $249 per year. 2010 by InvestorPlace Media, LLC, Founding Member of the Newsletter Publishers Association of America. Photocopying, reproduction or quotation strictly prohibited without the written permission of the publisher. While the information provided is based upon sources believed to be reliable, its accuracy cannot be guaranteed, nor can the publication be considered liable for the investment performance of any securities or strategies mentioned. Subscribers should review the full disclaimer and securities holdings disclosure policy at www.rband.com/disclosure.html or call 800/219-8592 for a mailed copy. Periodicals postage rates paid at Rockville, MD, and at additional mailing offices. Postmaster: Send address changes to Richard E. Bands Profitable Investing, InvestorPlace Media, LLC, 700 Indian Springs Drive, Lancaster, PA, 17601.

Profitable Investing | January 2011 | www.rband.com

at $50 or less. Now Im slipping ConAgra (NYSE: CAG) into the main model portfolio. Based in Omaha, smack dab in Americas breadbasket, CAG is known for a powerful lineup of consumer brands, including Banquet, Healthy Choice and Marie Callenders frozen entrees; Egg Beaters; Hebrew National franks; Hunts tomato products; Orville Redenbachers popcorn; Peter Pan peanut butter; Wesson oil; and many more. In recent years, the company has steadily lowered its risk profileby selling its volatile commoditytrading business and paring debt. Meanwhile, management has aggressively bought back stock and raised the dividend, which had been cut in 2006 under a previous regime. Yielding a lip-smacking (and safe) 4.1%, CAG perfectly jibes with our emphasis on earning as much of our payoff up front as possible. Im targeting a share price of $26 within a year, for a total return of more than 20% from here.

What to do now: Buy CAG at $23 or less. Were tracking the stock as one of our Growth & Income Plays. To make room for ConAgra and give our model portfolio a slightly more defensive tilt, were selling FedEx Corp. (NYSE: FDX). Transport stocks like FDX are extremely sensitive to the pace of business activity, making them vulnerable to even minor economic hiccups (to say nothing of recessions). Year to date, through mid-December, FDX has returned 12%. As part of this shift, were moving 2% of the portfolio from World-Class Franchises to Growth and Income Plays. See p. 7 for the new weightings.

the model portfoliohave been called for early redemption (at 100 cents on the dollar). Its time to demand more yield, without shouldering excessive risk. Heres what I advise. Think of your fixed-income portfolio as a pie with one big slice and two smaller ones. The big slice, approximately 60% of the total, should consist of CDs and short-term bond funds assets with a high degree of price stability. Ally Bank remains my favorite all-around CD provider, offering best-of-class yields all along the maturity spectrum (up to 2.4% at five years). No initial minimum. I suggest dividing the rest of your pie into two approximately equal slices. Each slice will let you earn a higher yield than you could on the big slice. To capture the juicier yield, though, you must be willing to swallow a spoonful of either credit risk or maturity (interest rate) risk. In the credit slice of the pie, youll emphasize intermediate maturities to limit your exposure to fluctuating interest rates. In the long-term slice, where rate fluctuations markedly affect the resale value of your holdings, youll focus on high-quality credits to lessen your default risk.

The Credit Slice

Up

with i ncome

its oK to demand a Pay Hike

The financial turmoil of the past few years has left retirees and other income investors shellshockedso much so that many folks are still holed up in bank accounts and money market funds that yield next to nothing. In Profitable Investing, Ive encouraged you to shop for higher yields in various places. Weve bought CDs at Ally Bank (www.ally.com) and Sallie Mae Bank (www.salliemae.com), two institutions that consistently pay rates well above the national average. In late 2009 and early 2010, we purchased Freddie Mac step-up bonds with a going-in yield of 4%. The world turns, however. Wall Street has left crisis mode behind, and now our Freddies maturing in December 2024which we had tucked into
Profitable Investing | January 2011 | www.rband.com

Mortgages and intermediate-term corporate IOUs are the basic ingredients that go into the credit slice. To give you easy access, I recommend a pair of no-load funds: DoubleLine Total Return Bond Fund (DLTNX; 877-354-6311, $2,000 minimum). Managed by Jeffrey Gundlach, a seasoned bond pro with a great track record, this no-load fund is currently invested almost entirely in mortgage paper. Essentially, youre buying Gundlachs expertise at judging credit qualityhis ability to separate good mortgages from bad. The fund yields a handsome 8.7%, annualized from the three most recent monthly distributions. Pay up to $11.10. Vanguard Intermediate-Term Investment Grade (VFICX; 800/662-2739, $3,000). Much more sedate than Jeff Gundlachs fund, VFICX focuses on better-grade corporate bonds. Average maturity stands at 6.8 years, so you can expect smaller shareprice fluctuations than with a long-term bond fund. Current yield: 4.4%. Pay up to $10.20.

What to do now: For the model portfolio, were opening a new category called Intermediate Credit Bonds to hold DLNTX and VFICX. Each fund will make up 4% of the portfolio, for a total of 8% (see table on p. 7).
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The long-Term Slice

At todays yields, Im not generally excited about long-dated bonds. However, I make an exception for one market sector: municipals. While Im keenly aware of the budgetary challenges facing Americas state and local governments, I believe that, in the great majority of cases, the extraordinarily high yields now available on municipal bonds more than compensate for any ascertainable default risk. Build America bonds (taxable munis) make the most sense for your IRA or other pension account. Currently, the exchange-traded PowerShares Build America Bond Portfolio (NYSE: BAB) yields 5.9% more than Vanguards long-term corporate bond fund, yet BAB enjoys a higher average credit quality. Ill take a freebie like that any day! Among the traditional tax-exempt munis, I recommend the closed-end Nuveen Quality Income Municipal Fund (NYSE: NQU). Its paying 6.8%, the equivalentfor a taxpayer in the top bracketof a taxable bond yielding 10.5%. NQU uses leverage, so its share price can bounce around. But this is too good a bargain for income investors to pass up. Buy at $13.50 or less.

Although the dollar has traded in an erratically rising pattern since mid-2008, the longer-term trend (dating back to 1971) points downward. For a U.S investor, a falling dollar pushes up foreign stock prices in dollar terms. Emerging markets are growing much faster than their developed counterparts. In 2010, Chinas real (inflation-adjusted) GDP grew about 10%, Indias about 8% and Brazils about 7%. The United States, by contrast, is estimated to have grown less than 3%, and the European Union less than 2%. Clearly, theres huge growth potential for investors to tap intoas long as we place our bets in the right countries at the right price.

euro Gets nailed

What to do now: For the model portfolio, were bumping up our weighting in Long-Term Bonds to 8% of the total, from 5% previously. BAB represents our entire holding in this category. Our cash reserve, meanwhile, drops to zero.

GoinG Global
investing Without Borders: Still a Smart idea
Hey, Ive got news for you. Despite all the hoo-hah about the death of the American economy, U.S. stocksin dollar termsoutran most foreign bourses in 2010. In fact, since May 2008, a $10,000 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. So why even bother to diversify overseas? Paradoxically, now may be among the best of times to spread your wings beyond our borders, 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 Statesdespite equal or superior management quality and growth prospects.
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Our global strategy at Profitable Investing embraces developed as well as emerging markets. In the developed world, Im finding the best values right now in Europe, where the debt woes of the so-called peripheral countries (Greece, Ireland, Portugal, Spain) have once again hammered the euro in recent weeks. As a result, a dollar-based investor today can buy some of Europes strongest business franchises well below the prices these stocks fetched in the spring of 2010. My top picks as we speak: Philips Electronics (NYSE: PHG). Headquartered in Amsterdam, Philips is Europes answer to General Electricwithout GEs deadweight financialservices arm. PHG manufactures advanced medical devices, with a focus on diagnostics; lighting systems and components; consumer electronics (such as flatscreen TVs); and household appliances. When the books close on 2010, I expect PHGs operating profits to hit an all-time highGE please copy! Furthermore, while GEs dividend (even after the recent hike) remains 55% below its 2009 peak, 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. At barely 5X estimated 2011 cash flow (enterprise value divided by EBITDA), the stock is quoted at a yawning 40% discount to its average valuation for the past five years. Current yield, based on last years dividend: 3.1%. Total (NYSE: TOT). A real cheapie among the worlds major oils, Paris-based Total sells for only 8X estimated 2011 profits, versus 11X for ExxonMobil (a company I love, but lets face it, Exxon is no longer on the bargain rack). TOT also
Profitable Investing | January 2011 | www.rband.com

serves up a plump 5.7% dividend, paid in two semiannual installments, May and November. Every inflation-wary investor should own some energy stocks. Thanks to the depressed euro, you can buy this one at an unusually low price. Dont let the opportunity slip through your fingers.

only funds, and most Chinese stocks, in the New Year.

Younger and Healthier

What to do now: Buy PHG at $32 or less, and TOT at $55 or less. Im projecting a total return of more than 20% for both stocks in the next 12 months. To make room for Philips among our World-Class Franchises, were moving ExxonMobil (NYSE: XOM) to our list of Niche Investments. XOM is still worth holding if you own it, but I wouldnt add to my stake unless the share price drops to $67 or less. Were tracking Total among our Growth & Income Plays. Tax tip: The Dutch government imposes a 15% withholding tax on dividends paid to U.S. shareholders. France withholds 25%. You can recover this tax via a credit on your U.S. 1040, but only if you hold the stock in a taxable account (not an IRA).

China, an emerging dud

As we go to press, emerging markets, as a group, are running neck-and-neck with New York for 2010. Quite a comedown from 2009, when the MSCI Emerging Markets Indexup a staggering 78.5% nearly tripled the return of the S&P 500. Why the cooling off? Mainly, I think, its because the 2009 monster rally erased much of the valuation discount that investors had demanded of emergingmarkets stocks during the financial crisis. Prices reverted to normal (that same old song again!). For the New Year, strong economic growth rates should enable certain emerging markets to pull comfortably ahead of the developed world. Other EMs, thoughincluding the 800-pound gorillawill limp behind. The gorilla, of course, is China. In 2010, mainland Chinese investors drove the Shanghai index down almost 12% through December 17, one of the weakest performances among global bourses. Chinese stocks listed in the United States fared better, but still lagged the Dow and the S&P 500. The locals, I suspect, are growing uneasy with Chinas wildly unbalanced economytoo much construction, too many factories operating way below capacity. My advice: Stay away from ChinaProfitable Investing | January 2011 | www.rband.com

For new money, I prefer Brazil and India, the two big emerging markets with the healthiest (youngest) long-term demographic profiles. China, on the other hand, will by 2032 have almost the same percentage of people over 65 as the United States. Remember, though, that even the most dynamic emerging markets carry risks as well as rewards. Brazil, for example, sends 15% of its exports mainly raw materialsto China. If the Chinese economic machine were to sputter, Brazil would feel the impact. Likewise, Indias government is running a massive budget deficit, virtually the same (in proportion to the countrys output of goods and services) as our own. Invest, by all means, but in reasonable amounts and with your eyes wide open! Exchange-traded funds continue to be my preferred way to play. With PowerShares India Portfolio (NYSE: PIN) and iShares MSCI Brazil Index Fund (NYSE: EWZ), you can ride the emerging-markets wave for all its worth, while spreading your betsfor safetyamong dozens of individual companies.

What to do now: Buy PIN at $24.50 or less, and EWZ at $75 or less. For both funds, Im projecting a total return of 15% or more in the coming year. Were tracking both in our main model portfolio.

total RetURn poRtfolio

Beware the Bidding War
After a fine year like 2010, its only natural for investors to want to celebrate. And were celebrating! Weve had some great winners in our model portfolio, starting with our three master limited partnerships, which rolled up an average return of more than 30% (through mid-December). Aqua Americaa simple, dull old water utility soared 31%, including reinvested dividends. Oracle, not exactly a new kid on the block, leaped 29%. McDonalds surged 27%. Our Midcap Spyders jumped 25%. President Obamas landlord, Government Properties Income Trust, fattened our wallets 19%. We couldnt be happier! At the same time, its important to keep our
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wits about us as we forge ahead into 2011. Some Wall Street strategists, intoxicated perhaps by the presidents compromise (collapse) on taxes, have launched a bidding war to see who can predict the biggest stock market spike in the New Year. Ill watch that game from the sidelines, thank you. There will be plenty of time to lift our forecast later in the year, if conditions warrant. For now, lets count our 2010 profits, celebrate themand protect them.

outlook and Strategy

Here, in condensed form, is my outlook and strategy for the model portfolio: Stocks (60% of the total) have mounted a dazzling rally off the summer lows, but now look overdue for a significant pullback (at least 4%7%). Put/call ratios have plummeted, indicating way too much optimism among the markets crapshooters, whose judgment tends to be notoriously wrong at important turning points. In addition, fewer and fewer individual stocks are following the indexes to new 52-week highsa worrisome divergence. 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. In particular, I recommend selling volatile stocks that appear to be pricing in a rip-roaring economic expansion in the New Year (which probably wont occur). From our Niche list, I would sell cyclicals Dow Chemical (NYSE: DOW), Home Depot (NYSE: HD) and Lowes (NYSE: LOW), as well as the exchangetraded PowerShares Water Resources Portfolio (NYSE: PHO). All have less than 5% appreciation potential remaining in the year ahead, according to my calculations. On the buy side, if youve never owned McDonalds (NYSE: MCD), one of the most successful business franchises of the past decade (or any decade), Mr. Market may soon give you a good opportunity to dip your toe in. With the herd rushing into cyclicals, some impetuous investors have decided to dump their boring consumer-staples stockseven though, of course, MCD has easily beaten the market indexes for the past five years (and longer). Take advantage of the crowds shortsightedness and snap up a few shares at $77 or less. Current yield: 3.2%. For the coming year, I project MCD will deliver a total return in the mid-teens. In the utility space, Im promoting gas distributor AGL Resources (NYSE: AGL) from the Niche Portfolio to our Incredible Dividend Machine. Based
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in Atlanta, AGL has just made a takeover bid for NICOR (NYSE: GAS), a financially sound gas ute serving suburban Chicago. The deal should add modestly to AGLs earnings in the second year. Currently, AGL yields 4.9%. I look for the dividend to grow at a 3%4% pace over the next five years, starting with a likely increase in February 2011. Pay up to $37.90. AGL will replace Verizon (NYSE: VZ) in the Machine. If you own Verizon, hold it; well continue to track VZ as a Standby member of the Machine. However, the stock has climbed too rapidly in recent months to merit new buying at these levels. Fixed income (40%). Bond prices have gotten slammed since early October as investors picked up the scent of an improving economy. Now, though, with the benchmark 10-year Treasury yield topping 3.3% in recent sessions, it appears the pendulum has swung too far. Surging mortgage rates have already begun to crush the fledgling recovery in housing. The contagion is also spreading to Europe, where rising bond yields are making it more difficult for financially strapped governments to sell their debt. I expect yields to crest during the first quarter and then to ease modestly into midyear. Strategy: Keep most of your fixed-income stash in short maturities, but take a smaller position in intermediate and long-term bonds along the lines I suggested on p. 34. As an alternative to the intermediate-term bond funds highlighted earlier, income investors might earmark a parcel of cash to FS Investment Corp. This newly organized businessdevelopment company invests in senior bank loansloans secured by a lien on the corporate borrowers assets. Rates on the loans are tied to short-term bank funding costs, so theyre now probably about as low as theyll go in the current cycle. Franklin Square/ GSO Blackstone, the manager, sports a considerably better long-term record than most of its peers, with a lower default rate and a higher recovery rate (in cases where loans have defaulted). At the current offering price of $10.40 per share, FSIC yields 7.3%. (Monthly distributions.) The unusually high yield stems from leverageborrowed money. As a closed-end fund, FSIC doesnt ordinarily redeem its shares, nor will there be an active secondary market for you to sell into. Thus, you should plan to hold for at least five years to seven years, until FSIC seeks a listing on an organized stock exchange.
(continued on p. 8)

Profitable Investing | January 2011 | www.rband.com

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.P. Morgan Chase Microsoft News Corp. 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%, down from 23%) Buy Below

Comments

Dec. price spike leaves stock overvalued; watch blog for possible sell Dividend boost coming soon, but dont get carried away; observe limit 6.9% dividend hike, payable Jan. 4, shows directors bullish on 2011 Hold; were moving to Niche status to make room for Philips (see p. 5) Despite dilutive takeovers, stock is too cheap at 8X forward earnings Rising 2011 earnings estimates prompt us to nudge up our buy limit Dont chase; coming dividend increase may be smaller than expected Dominant market share, pristine balance sheet: an all-weather holding Fee-based online newspaper content is working at WSJ, London Times Healthier pipeline of medicines nearing FDA approval than most rivals Stock now within a whisker of all-time (May 2008) high; buy dip only Dec. price spike leaves stock overvalued; watch blog for possible sell Low valuation (12X est. 2011 net) makes co. 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, but respect our buy limit to keep your risk low Has paid uninterrupted dividends since 1924, increased 38 yrs in a row Dividend yield twice the S&P 500 index, a valuable defensive attribute Safest publicly listed REIT, thanks to govt tenants (94% of rents) Pullback creating another buying opportunity in top global brand Surge in Swiss franc has inflated share price; wait for pullback to buy Russian dairy deal unexciting, but we like PEPs dividend and safety Earnings growth should get back on track with March 2011 quarter Latest dividend sweetened 4%, 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, cost cuts yield bigger than expected Q3 profit margins Yield now too low, due to share appreciation; buy on pullback only Back in our buy range, thanks to big secondary offering (share glut) Yield now too low, due to share appreciation; buy on pullback only Midcaps now very expensive vs. large caps; we may pare holding soon Stock now pricey on year-ahead earnings; wait for pullback to buy Ultra-strong balance sheet, with attractive yield for income seekers Were lowering buy limit to reflect tighter generating profit margins Building solar plant in Calif. desert big enough to power 75,000 homes Should report 8%9% earnings growth in 2011, robust for a utility Dividend safe for coming year at least; current pre-tax yield 7%

Emerging Markets (4%)

iShares MSCI Brazil Index PowerShares India Portfolio

75 24.50 54 23 26 77 52 66 63 29 55 29 62 42 75 152 20 27 73 53 47 73

Growth & Income Plays (15%, 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 McDonalds

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. HHHH Entergy HHHH NextEra Energy
PG&E Corp. RWE

Fixed Income (40%)

Raise Your Rate CD (15%)
Ally Bank, PA 866/247-2559 877/346-2756 ----11.10 10.20 25.50 1.56% going-in yield, with option to raise your rate once during term Generous (by todays standards) 1.3% yield, with FDIC-insured safety Lofty 8.7% yield on mortgages selected by world-class money manager Emphasizes better-grade corporates; a good blend with riskier DLTNX Higher yield than corporates; fears of bloated muni supply overdone

One-Year Bank CDs (9%)

Sallie Mae Bank, UT

Intermediate Credit Bonds (8%, new position) HHHH DoubleLine Total Return Bond MF: DLTNX HHHH Vanguard Interm. Investment Grade MF: VFICX Long-Term Bonds (8%, up from 5%) HHHH PowerShares Build America Bond Portfolio NYSE: BAB

Note: For Mutual Fund Alternatives, please see the online portfolio.

Profitable Investing | January 2011 | www.rband.com

(continued from p. 6)

summaRy

1. Sell Fedex Corp. (NYSE: FDX) from the model portfolio, as well as Niche Investments dow Chemical (NYSE: DOW), Home depot (NYSE: HD), lowes (NYSE: LOW) and PowerShares Water resources Portfolio (NYSE: PHO). 2. BuY Conagra (NYSE: CAG) at $23 or less. 3. BuY doubleline Total return Bond Fund (DLTNX, 877-354-6311) at $11.10 or less, and Vanguard intermediateTerm investment Grade Fund (VFICX; 800/662-2739) at $10.20 or less. 4. BuY PowerShares Build america Bond Portfolio (NYSE: BAB) for the model at $25.50 or less. Upper-bracket taxpayers can buy nuveen Quality income Municipal Fund (NYSE: NQU) instead at $13.50 or less. 5. BuY Philips electronics (NYSE: PHG) at $32 or less; Total (NYSE: TOT) at $55 or less; PowerShares india Portfolio (NYSE: PIN) at $24.50 or less; and iShares MSCi Brazil index Fund (NYSE: EWZ) at $75 or less.
riCHard e. Band is the newsletter worlds #1 authority on investing for low-risk growth. His Total Return Portfolio has nearly quadrupled investors money since inception in 1990, while taking far less risk than the popular stock indexes. He is the author of Contrary Investing (named Best Investment Book of 1985, subsequently updated), and a popular speaker at investment conferences. Bands straightforward style and safety-first value approach have won numerous awards, including eight in the Best Financial Advisory category by The Specialized Information Publishers Foundation. Band has appeared on CNBC and been quoted in Barrons, Forbes, The Wall Street Journal and other leading publications.

actions to Take This month

Minimum to open an account: $5,000. For literature, call Bob Condon or Jerry Kohn at Foundation Investment Group in Berkeley, Calif. (800/899-8779). You can also view a prospectus at www. fsinvestmentcorp.com.

one final thoUGht

Christmas in Kennebunkport
Im sorry, all you good folks who live in sunny climes where Christmas is celebrated amid palm trees and soft breezes. That may be more like the original setting of the story. But I must say, theres something special about bundling up in your warmest coat and cap and mittens, and singing out to defy the elements: Let it snow, let it snow, let it snow! Happily, the snow held off, a couple of Sundays afternoons ago, when Enid and I joined our daughter Georgina and her family for the annual Christmas Prelude in Kennebunkport, Maine. After gorging ourselves on a seafood dinner by a roaring fire, we ventured out into the frigid coastal air to take in the townthe shops, the lights, the decorations, the carolers. And then the climax of the day, just after two oclock. To the delight of our grandchildren Louisa and Tommy, Santa Claus arrived, barrelchested and merryat the dock, on a lobster boat! Where else on Earth but in ice-bound Maine? I dont know where you were planning to spend the holidays. I hope, though, its a place where the warmth of friends and family, and the true meaning of the season, bring you joy and peaceeven if the weather outside is frightful. My hands are chilled at the keyboard, and Ive got to run upstairs to warm my mug of peppermint tea, so Ill sign off. This month, align your portfolio for double-digit profits in the New Year with as little risk as possible. Sell volatile stocks like FedEx and buy steady performers like ConAgra. For the income sector of your holdings, take advantage of the recent back-up in bond yields to build a meaningful stake in DoubleLine Total Return Bond Fund, Vanguard Intermediate-Term Investment Grade Fund and PowerShares Build America Bond Fund. The scaremongers will be proved wrong about bonds! Finally, dont overlook the benefits of global diversification. In the developed markets, Philips and Total give you ample dividends and more appreciation potential than their stateside peers. Meanwhile, with our exchange-traded India and Brazil funds, you can make a cautious, welldefined bet on the explosive growth of emerging markets. Yours for Profitable Investing,

Richard E. Band P.S. Will I be seeing you at the World MoneyShow in Orlando (February 912)? Im working on two special presentations, about dividend investing and The Coming Demographic Tsunami. You wont want to miss them! For free tickets, click on www.moneyshow. com/twms or call 800/970-4355 and mention code 020478.

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. New? Theres nothing really new about it. In my writings, Ive been advocating a cost-conscious, high-savings lifestyle for more than 30 years. But Im glad to welcome the newcomers aboard anyway, 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. I dont doubt, for a moment, that Americans can help make the world a better place in the years ahead by learning to save more and borrow less. Its the only way to go, really, if we want all Gods children to live in a sounder, more stable global economy, with stronger long-term growth prospects. Lets not kid ourselves, though. The main reason for bringing your expenses into line with your income, here and now, is so that you (and those you love) can enjoy the abundance of things you want to have and do later on. Its not about changing the world; its about changing your worldyour future. I made that decision long ago. And because of it, Im financially independent today. Lets talk about how you can do the same.

Priceline. Half-jokingly, I offered $89the same price a nearby Red Roof Inn was asking. We got the Marriott for 89 smackers. You can repeat this process in many different settings. Often, its possible to substitute a lower-cost product for a higher with no loss of quality. Cable company squeezing you? Switch to satellite (www. directv.com). Car insurance costs too much? Take your business to Geico (www.geico.com). In fact, you may find it isnt even necessary to change vendors. Merely threatening to do so will prompt your existing provider to grant you a concession. Of course, you should always make your argument politely, with facts to back you upparticularly if youre requesting a discount from a licensed professional (doctor, lawyer, CPA, etc.). But if the person on the other side of the table understands youre serious, odds are youll walk away with a lower bill.

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, perhaps not totally free, but at a significant discount to the manufacturers list price. Train yourself to be a discount shopper so that more of your income stays in your own pocket to invest and grow. Heres the key: Treat every price as an asking price, nothing more. In some cases, you can negotiate a lower price by presenting a counteroffer directly to the seller. I love Internet sites like Priceline and eBay for this purpose. Recently, Enid and I were looking for a hotel room in the Washington, D.C., suburbs. A tony Marriott was charging $299 a night if you booked on the hotels Web site. We decided to bid for a three-star room on

As you get into the habit of shopping for bargains, an interesting thing will happen. Youll discover that some toys you thought were a must-have right nowyou can do without, at least for a while. And you wont even miss them, because youll catch a vision of what your newfound savings can do for you over the longer pull. Savingsthe difference between what you take in and what you spendare the indispensable raw material for building wealth. During the bubble years (roughly 19952005), a lot of Americans fell for the widely trumpeted deception that you can borrow your way to riches. Its a technique that works as long as the asset you borrowed against (your house, say, or your stock portfolio) keeps rising faster than your cost of carry. As soon as the market goes into reverse, however, your profits begin to meltand the debt remains. Youre crunched. But you dont have to face that heartbreak. Set a goal to spend no more than 90% of what you earn (even if youre retired). To supplement your discount shopping, pay down your credit cards and other high-cost debt until youre saving at least 10% of your income. Then stretch your goal, as youre able,
(continued)

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Special Supplement

to 15%, 20% or more. Your wealth will explode! Lets assume you save 20 cents of every dollar you earn, and you invest it at a modest 5% return. Within a decade, your kitty will add up to 258% of your annual salary. In 20 years, it will be worth 678% of your salaryeven without any pay increases. If saving comes hard to you, I suggest making it automatic. Sign up for your employers 401(k) plan. Arrange to have a fixed dollar amount transferred each month from your checking account to your investment program. (Many mutual funds offer this option.) Dont let artificial obstacles stop you from harnessing the awesome power of compounding wealth.

the Frugal investor

Theres one more thing you can do to accelerate, dramatically, your wealth accumulation. Be a frugal investor. Dont overpay, either for investment-related services or for the investments themselves. As you know from past newsletters, Im a strong believer in discount brokerage and no-load mutual funds. In rare cases, Ill pay a full-service brokers commission, but only for an outstanding product unavailable elsewhere. Hedge funds, with their top-heavy fee structures, are off limits. So are brokers wrap accounts, unless the broker is adding real value (such as tax or retirement advice). Variable life insurance and variable annuities? Except for a couple of low-cost products offered by Fidelity and Vanguard, fuhgedaboudit! Operating expenses are too high for todays returns. Among the big-name discount brokers, Fidelity deserves mention for its low $7.95 flat rate on stock orders (800/343-3548 or www.fidelity.com). Better yet, if youre a Bank of America customer with a balance of at least $25,000, you can place up to 30 free trades per month through BofAs MerrillEdge program for self-directed investors (www.merrilledge.com). I recently opened a MerrillEdge account myself, and I heartily recommend it. The trading platform is clearly laid out and easy to use. Furthermore, customers get access to Merrill Lynch research, world-class stuff, far superior to the rinky-dink stock reports spewed out by most other discounters.

bargain buyer. I dont mean borrowing money. I mean hunting for, and insisting upon, discounts of all kinds: stocks selling at a deep discount to historical norms; closed-end funds selling at a discount to net asset value; real estate at a discount to appraisal. When you buy at a discount, you automatically enlarge any profits you make as the investment rises to fair value. And this leverage costs you nothing, except persistence and patience. Back in August, in my online Richards Journal (www.rband.com), I recommended a non-publiclytraded REIT, Corporate Property Associates 14. At the time, we were able to buy CPA 14 at a doubledigit discount to the appraised value of the trusts properties. Now comes word that W.P. Carey & Co., the REITs sponsor, wants to merge CPA 14 into another REIT in the CPA series. You can take the new stock, or cash, as you like. I recommend taking the stock, unless you have an immediate need for the cash. But if you take the cash, I figure youll notch a total returndividends plus capital gainsof about 26% in seven months. And thats without any change in the value of the underlying real estate. Youre reaping a windfall because you bought at a discount. So indeed, the old saying proves right again. The best things in life are free!

Short BitS

and

Follow-UpS

the Joys of Free leverage

Finally, when choosing investments, dont forget the magnificent, free leverage at your disposal as a
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Were not the only folks buying municipal bonds these days. In December, Bill Gross of PIMCO, probably the worlds greatest living bond investor, purchased $4 million of PIMCO closed-end muni funds for his personal account. While thats a drop in the bucket for a guy whose net worth reportedly exceeds $2 billion, its a vote of confidence nonetheless. Keep buying Nuveen Quality Income Municipal Fund (NYSE: NQU) at $13.50 or less. Cellcom Israel (NYSE: CEL) is ringing up a buy signal. First written up in our November issue, shares of Israels largest wireless provider have since dipped below our buy target several times. But now, weve got an even stronger reason to pounce. On December 1, CELs system malfunctioned for a few hours, annoying customers and sparking a rash of lawsuits. 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. Undoubtedly, CEL will have to take a charge

Supplement to Profitable Investing | January 2011 | www.rband.com

Special Supplement

against Q4 profits for the service disruption. After that, though, the companys earnings will march forward again. For best results, place a limit order with your broker, good till canceled, to buy at $33

or less. I estimate CEL will pay total dividends of about $2.70 in 2011, for a yield of just over 8% at the current share price.

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. Ive designed these fund portfolios to mimic, as closely as possible, the performance of the stocks and bonds in our main Total Return Portfolio. Our Fund Supermarket Portfolio makes the nearest match. Its composed of funds you can purchase through leading discount brokers (Schwab, Fidelity, TD Ameritrade, e*Trade, etc.). As a rule, I favor funds available with no transaction fee, although I occasionally make exceptions when I find a fund with a unique strategy or performance record. For loyalists who prefer to deal with a single fund group, I provide All in the Family Portfolios with funds drawn from Fidelity, T. Rowe Price or Vanguard. Our Hassle-Free ETF Portfolio caters to fans of low-cost exchange-traded index funds. (See boxes below.) This month, in keeping with the posture of the main Profitable Investing model portfolio, were holding the overall allocation of the Fund Supermarket Portfolio steady at 60% stock funds, 40% fixed income. However, Im making a couple of adjustments. On the stock side, were dialing back our risk by trimming 3% from Perkins Midcap Value and 2% from Marsico Growth. Well switch the proceeds to Gabelli Equity Income (GABEX). Through midDecember, GABEX has gained 15% for 2010, a superb performance for a conservative fund that concentrates on dividend-paying stocks. Among our fixed-income holdings, were adding 2% to DoubleLine Total Return Bond, bringing that fund up to a 5% weighting. (See p. 3 of the main issue for my comments about Double Line.) Im also tacking on 4% to PIMCO Total Return Fund, the flagship of bond king Bill Gross. Cash goes to zero. For new money, I award pride of place to DLTNX and PTTDX. If youre on a limited budget this month, start with these funds. Since our last review two months ago, bond prices have dropped sharply, tilting the value proposition back toward bonds. Among the stock funds, my preferred vehicle for fresh cash is GABEX. However, the market now appears vulnerable to a 4%7% correction. Accordingly, I suggest dribbling money into GABEX in two or three installments over the next month or so. Accelerate your buying program if the Standard & Poors 500 index falls more than 5% from its most recent closing high (1243). Portfolio weightings after this months 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, were leaving the basic stock/fixed income allocation of our All in the Family portfolios unchanged from our last review in November. However, Im now much less concerned about a backup in bond yieldsthe bulk of the move has already occurred. Accordingly, were shifting the Fidelity and T. Rowe Price portfolios cash reserve (formerly 6%) into the two multistrategy bond funds, Fidelity Strategic Income and T. Rowe Price Spectrum Income. Vanguard doesnt offer a multistrategy fund, so Im pouring our cash reserve into Vanguard Intermediate-Term Investment Grade. (continued)
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Special Supplement

These three funds are my top buys for new money this month. With trader sentiment on bonds now languishing at an 18-month low, the contrarian inside me is whispering that the bond market could hand us some nifty trading profits in 2011. Over on the stock side, the markets extremely overbought condition, alongside the technical weaknesses I pointed out on p. 6 of the main issue, dictates that we take some defensive measures. In the Fidelity portfolio, Im trimming 2% from Contrafund and 3% from Blue Chip Growth, while adding the proceeds to Equity Income (FEQIX). FEQIX is by no means my favorite fund for dividend seekers, but its the best Fidelity has to offer. If youve got a brokerage account with Fidelity, I recommend substituting Gabelli Equity Income (see Fund Supermarket Portfolio) instead. In the T. Rowe Price portfolio, Im switching 2% from Value and 3% from Growth Stock to Equity Income. Unlike its Fidelity rival, T. 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. Rowe Price organizations chairman). Finally, in the Vanguard portfolio, Im swapping 2% from Value Index and 3% from Growth Index into Equity Income. It stands to reason that the equity-income funds in each group deserve top priority for your new stock money this month. Bear in mind, though, that I expect a pullback in the weeks immediately ahead. Spread your purchases over two or three installments. Portfolio weightings, after this months changes, 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. rowe price (800/638-5660)

21% 20% 19% 13% 12% 6% 5% 4%

Intermed.-Trm. Inv. Grade Equity Income Short-Trm. Inv. 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, the ETF portfolio is holding steady at 60% in stock funds, 40% in fixed income. Note, however, that were bolstering our stake in PowerShares Build America Bond Portfolio (BAB) by 3%. To accomplish this objective, Im eliminating our 1% cash reserve and shifting 2% of the portfolio from short-term bonds (iShares Barclays 13 Year Credit Bond Fund). BAB is your top bond buy this month, 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. Pay up to $25.50. On the equity side, were padding our safety cushion by adding 5% to WisdomTree Total Dividend Fund (NYSE: DTD), our highest-yielding stock fund. (Current yield: 2.8%). Simultaneously, Im closing out our 5% stake in iShares S&P SmallCap 600 Value Index Fund (NYSE: IJS). After a sizzling run in 2010 (IJS was up nearly 23% through mid-December), small caps are expensive by most historical yardsticks. Take your profits and toast your good fortune! While DTD is my top buy this month among our stock funds, I repeat my caution that a market pullback seems likely in January. Buy in two or three stages over the coming month or so. After this months changes, 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)

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Supplement to Profitable Investing | January 2011 | www.rband.com