The financial markets have had their own problems over the years. A study by the International Monetary Fund detailed 125 separate financial crises worldwide since 1970. In the U.S., we’ve seen a stock market downturn an average of once every eight years since 1970. Before that, in a period dating back to 1800, the average time period between market crashes was 14 years, according to research conduced by Stanford University professor James Van Horne. Some experts, including Van Horne, blame financial and corporate deregulation for the increased tempo of market disruptions.

In any event, we know from history that periodic market panics and crashes are common occurances. We know that with careful planning and the right strategy, we can actually profit from the market’s bad news. All of this is not to imply the market’s plunges are harmless- to the contrary, those unfortunates who wind up on the wrong side of a market correction often see their net worth wiped out in a devastatingly short period.

Speculative bubbles have almost always been caused by excessive lending on farmland and real estate, which inflates prices until the inevitable adjustment that leads to bank failures. That’s been the root cause of crises and panics dating back to time immemorial. Following each successive market crash, the public has become as pessimistic as it had been optimistic before the downturn.

For whatever reason, people don’t tend to think long-term when making financial decisions. Perhaps it is human nature to want to get as much as you can as soon as possible, for immediate gratification. People often want to get it all when it’s available, and worry about the future later. That hasn’t changed for thousands of years, and it’s not likely to change soon.

Be Skeptical of ‘Experts’
The investing world has no shortage of experts who promised to “crash-proof” investors’ portfolios. In the recent past, they urged individual investors and institutions to diversify and buy into emerging markets such as China, Russia, and Brazil, and into commodities and leveraged hedge funds.

Far from protecting investors, this advice led to a bloodbath on Wall Street. When the panic of 2008 came along, emerging markets, commodities and leveraged hedge funds were among the hardest-hit investment sectors.

I would argue that planning your investment portfolio based on a doomsday scenario is extremely speculative and risky. Many of the forecasters who wrote books about how to crash-proof your portfolio against the coming cataclysm turned out to be wrong, and the investments they recommended fell far more than the broader market.

Commodities collapsed, with oil dropping from $150 per barrel to a low around $35 per barrel. As a sector, commodities lost twice as much as the stock market. The dollar, which was supposed to collapse got stronger and foreign currencies weakened. Even gold and silver, the much-heralded safe havens, declined.
If you want your money to work hard so you don’t have to, you need to look beyond the current tempest to build a lasting, sustainable portfolio.

This Week’s Stock to Watch:

Vanguard High Dividend Yield ETF (exchange traded fund) VYM: $24.60*

The Vanguard High Dividend ETF (VYM) invests in a basket of high yielding U.S. equities. Top holdings included beaten down bluechips like AT&T, Johnson and Johnson and Procter and Gamble Co. The fund currently yields approximately 5.7% and pays distributions to shareholders on a quarterly basis. With brand name stocks trading at extremely depressed prices, we view VYM as a solid way to own a diversified basket of these companies at bargain prices.

*Price as of3/10/09

Of course, business quality, isn’t just the purview of brand name blue-chip businesses. Smaller emerging growth companies that meet the quality criteria can be an even better place to look for fallen angels. Since large publicly traded companies are widely followed by analysts, owned by institutional investors, and have enormous share float, it generally takes an extreme event like a market panic or industry specific calamity to depress shares to fallen angel prices. Smaller businesses tend to have less analyst coverage, are less widely owned and have issued less stock. As a result, shares in these businesses tend to experience more price volatitliy which in essence provides for a more fertile hunting ground for the fallen angel bargain hunter.

Conscientious bargain hunters would do well to recognized the enormous opportunity provided by the market’s recent sell-off. We have put together a list of 10 fallen angels for the next 5 years. The list includes five larger blue chip companies along with five smaller businesses (market cap < $3 Billion) that meet our criteria for quality and value. The first five a large-cap behemoths. The next issue will feature five small fry that appear to be under-priced.

5 Blue-Chip Fallen Angels
1. General Dynamics (GD)
Down 54% from its 2008 high, General Dynamics offers a compelling long-term value opportunity in a quality defense contractor. The company has a history of consistently generating high rates of return on shareholder equity and is conservativly financed.

2. Google (GOOG)
Down 52% from it’s 2007 high, Google sports a pristine balance sheet, with zero debt. The company generates profit margins in the mid 20% range while returns on shareholder equity have averaged about 18% over the last several years.

3. Jacobs Engineering (JEC)
Down 58% from its 2008 high, Jacobs construction and engineering businesses are a likely beneficiary of the coming domestic infrastructure buildout. With little debt on the balance sheet and a history of generating strong returns on shareholder equity the company is well positioned to benefit as the business cycle shifts from the contraction to expansion phase.

4. Johnson & Johnson (JNJ)
Down 27% from it’s 2008 high, Johnson & Johnson offers investors a reasonably conservative way to play an eventual healthcare turnaround. The company has a long demonstrated ability of growing book value, consistently providing returns on shareholder equity greater than 25% annually.

5. Visa (V)
Down 38% from its 2008 high, Visa suffers from an image problem. Primarily that they are a credit card issuer, exposed to the kinds of financial risks facing other card issuers during a severe economic downturn. In reality, Visa is a payment processing firm with significantly less exposure to the economic contraction. The company generates net profit margins north of 20%, has very little long-term debt and holds a leading industry position.

Another reason most mutual funds under-perform the market has to do with investors’ behavior. People often buy funds only after the market is hot, and has risen for some time. The massive influx of new money into successful funds causes managers to buy stocks that are no longer cheap. When the inevitable correction comes, investors often panic and liquidate their fund holdings, forcing managers to sell what may have become attractively priced stocks at or near a bottom.

TEN STOCKS FOR THE NEXT 5 YEARS, Part 2
Our list of ten stocks for the next 5 years includes several issues that were popular with mutual fund managers until last years crash occurred. When mutual fund shareholders began liquidating, fund managers were forced to sell everything, including the stocks they had the most confidence in…at any price in a down market. This issue we will focus on smaller businesses with strong recovery potential. Here are five to consider.

1. Hansen Natural (soft drinks, beverages) HANS: $36.60
Down from its 2007 high above $67, Hansen remains a high quality, conservatively financed growth stock. Currently trading at a forward P/E of 14 we believe Hansen will revisit its former highs over the next few years.

2. Skechers Inc. (Shoes) SKX: $8.02
Down more than 60% over the last year, we feel that the selling in this stock has been overdone. The business is expected to generate .33 cents in profit for 2009 and .90 cents in 2010. With analyst consensus for future growth at 15%, we view SKX as a strong recovery candidate.

3. World Fuel Services Corp (fuel services) INT: $34.39
World Fuel Services has already rebounded nicely from its 2008 lows. Still, we view this marketer of marine, aviation and land fuel products as a bargain at current prices. The company is expected to earn $3.38 per share by 2010 and should benefit from the eventual reacceleration of global economic growth.

4. Move, Inc. (real estate marketing) MOVE: $1.95
Move, Inc. operates web sites for real estate search, finance and moving. The company’s shares are depressed along with the real-estate market that they serve. Still, MOVE is expected to be profitable in ’09 and generate solid growth over the next business cycle. At current prices we see substantial upside.

5. Lincare Holdings (home respiratory services) LNCR: $21.36
Lincare is down more than 30% since its September ‘08 high. The company has a history of generating high returns on shareholder equity, strong margins and free cash flow. We see continued strong demand for the company’s services and view the current price as a good long-term entry level.
** All prices as of 4/20/09

We can take heart in the knowledge that even the most experienced and celebrated investment professionals don’t always take their own advice when it comes to their personal finances. In a series of revealing interviews, The Wall Street Journal columnist Jason Zweig drove this point home.

John Bogle, the founder of Vanguard Funds, is famous for his belief that investors should rebalance their portfolios on a regular basis, selling what’s gone up and buying more of what’s gone down, using low-cost index funds. But Bogle admitted that he rarely touches his own portfolio and has gone years without changing his own asset allocations.

Harry Markowitz is a Nobel Prize-winning economist who analyzed the risk and return of a diversified portfolio. He told Jason Zweig, however, that he splits his own retirement contributions equally between stocks and bonds, failing to follow the investment formula that won him the Nobel Prize.

Most surprising was Zweig’s interview with Burton Malkiel, an economist at Princeton University and a prominent author on financial topics. Malkiel’s book A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, has been an influential volume advancing the efficient market hypothesis since its publication in 1973.

Malkiel argued that prices of publicly traded assets reflect all publicly available information. By Malkiel’s reasoning, no one can outperform the market, because it is the ultimate model of efficiency. His theory suggests that a dart thrower using the stock listing in The Wall Street Journal may be as effective as the efforts of any professional money manager. Malkiel has advocated index funds that simply track various broad market exposure.

Zweig revealed in his interview with Malkiel, however, that the famed economist keeps about a third of his own money in individual stocks and actively managed funds. “I call myself a random walker with a crutch,” he said.
Like the rest of us, these veteran investment professionals and theorists are immersed in the world around them and see the opportunities and inefficiencies in the market with their own eyes. They don’t want to miss out any more than you or I should want to.

THIS ISSUES FALLEN ANGEL FOR CONSIDERATION
KBR Inc. (heavy construction) KBR: $17.31*

KBR is a global contruction and engineering firm. Shares of this company are down more than 60% from their 2007 highs. The company, spun-off from Halliburton in 2005, has $1.1 billion in cash on its balance sheet and no debt. Currently trading at a P/E of 10 times we think these shares offer 50%+ upside over the next 3 years.

* Price as of 5/5/09

RSF man’s career includes rock n’ roll and high finance

•Firm’s Fallen Angels Income Fund ranked No. 1 in its category by Lipper

By Joe Tash

Long-time Rancho Santa Fe financial adviser Gabriel Wisdom didn’t expect his firm’s 18-month-old Fallen Angels Income Fund to be ranked No. 1 in its category by Lipper, a well-known mutual fund ratings service.
But earlier this month, that’s exactly what happened – even though the fund hasn’t been around very long, and its assets are modest in comparison to funds offered by such industry heavyweights as Fidelity, Vanguard and T. Rowe Price. Lipper ranked the Fallen Angels fund as tops among 537 similar funds in its category for year-to-date returns for 2008.

“It surprised us,” said Wisdom, 58, who is well-known in San Diego as a finance expert and a radio and television personality, including his early work as a “hippie DJ” at San Diego and Los Angeles rock radio stations.

Wisdom is managing director of American Money Management, which specializes in managing custom portfolios for its clients. It recently launched two publicly traded mutual funds, the Fallen Angels Income Fund and the Fallen Angels Value Fund, which take advantage of investment strategies developed by Wisdom and his partner, Michael Moore, to maximize their clients’ investments.

According to Wisdom, “fallen angels” is an old Wall Street term used to describe companies whose fortunes have declined, but are expected to rise again.

Rather than pulling back from a market because of falling stock prices, Wisdom and Moore think that’s the best time to shop.

“Our style is to remain in cash until bargains show up. This is a good market for us, we like it like this,” said Wisdom. Moore spends his days “combing the bloodied landscape,’ looking for something that’s fallen into excessive lows, well below its intrinsic value, said Wisdom.

Wisdom believes Wall Street operates in a way that runs counter to common sense, pointing out that when goods go on sale in a department store, shoppers flock to pick up bargains.

“Whenever anything goes on sale on Wall Street, buyers stay away, they withdraw,” said Wisdom. On the flip side, he said, buying “tends to hit its peak, in terms of participation, after prices have already risen for a significant period of time.”

The Fallen Angels Income Fund is a “mixed-asset” fund that seeks to provide income or dividends to investors, said Wisdom. The fund has no load or sales charge, and the minimum investment is $10,000. Currently, said Wisdom, the fund has assets of about $40 million.

The fund’s year-to-date return as of June 20 was 2.03 percent, according to the Morningstar rating service. According to Wisdom, the Fallen Angels Income Fund has done better than many other similar funds, which have suffered losses in this year’s volatile market. He said some sectors of the market are down 20 to 50 percent.

Wisdom has worked in the financial field in San Diego for 25 years. Before starting his own company nine years ago, he worked for investment houses such as Shearson Lehman Brothers, Prudential-Bache and Sutro and Co.

He has also provided commentary on financial issues for local television and radio stations, as well as “Marketplace,” a nationally syndicated financial affairs program that runs on public radio stations. “The Gabe Wisdom Show,” which features interviews with the authors of books on the stock market and investing, airs on AM 1000 at 4 p.m. each Monday and Friday.

Wisdom got his start in radio in the 1960s, when he worked as a disc jockey at such pioneering San Diego rock stations as KPRI and KGB.

“The Beatles were still together when I started in radio,” he said.

He served as the inspiration for a character in Cameron Crowe’s film about the rock scene in the early 1970s, called “Almost Famous,” which was filmed in San Diego.

His transformation from DJ to financial adviser began with a series of real estate investments in the 1970s, which turned sour with a market downturn in the 1980s.

“I wound up giving away my properties so I didn’t have to carry them,” he said. “It was a real hard lesson in economic and business cycles.”

The father of three daughters, Wisdom and his wife, Diana, a clinical psychologist, live in Rancho Santa Fe.

If you’ve kept score, carefully cataloging the public predictions of high profile experts, it’s hard not to be bullish on the stock market right now. Especially given all the scary economic and market headlines. Jonathan Laing’s story in Barron’s (Ready for Dow 20,000) reported Alan Greenspan now asserts that the current financial crisis is the worst faced by the U.S. since World War II. Other public figures concede that the latest crisis, the sub-prime mortgage meltdown, threatens to remove trillions of dollars from the capital markets.

Remember, you make your money in bear markets.  You just don’t know it at the time.  The greatest investors in history have paid little or no attention to day to day market fluctuations.  They focus on price (less is more), value (quality at a discount), and the rate at which their equity is compounding (rising book value).

“TO BET ON A PROLONGED SLUMP IS TO BET AGAINST THE GOVERNMENT, MARKETS, AND HUMAN NATURE.”
~James Finucane

“ANYONE WHO BELIEVES EXPONENTIAL GROWTH CAN GO FOREVER IN A FINITE WORLD IS EITHER A MADMAN OR AN ECONOMIST”
~Kenneth Boulding, Oxford educated economist

Consumer confidence is at a 17 year low, housing and retail are still slumping, and investors are fearful. Money market cash has soared to approximately $3.5 trillion dollars, versus $2.2 trillion at the market lows of 2003. Interest rates are lower than the rate of inflation, which suggests that governments and the Federal Reserve member banks have a clear incentive to promote growth. Money always goes where it’s treated best, and right now many of the world’s greatest businesses are on sale. We agree with Finucane’s analysis. The fuse for an explosive rally has been lit.
Buy the bargains now before the market takes off.

Read the whole issue here:
http://www.fallenangelsreport.com/email/060508/income-fund.htm

Disclaimer
The opinions expressed are those of Gabriel Wisdom and Michael Moore and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor who serves as portfolio manager to private accounts as well as to mutual funds. Clients of AMM, Mr. Wisdom, Mr. Moore, employees of AMM, and mutual funds AMM manages may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything. Current stock quotes are obtained at http://finance.yahoo.com. Prices are as of the close of the market on the previous day of trading.