The victory by Barack Obama on election night has resulted in a huge wave of firings and layoffs all over America.  A large number of businesses seem to have suddenly Read more…

Hurricane Sandy is another reminder of just how incredibly fragile the thin veneer of civilization that we all take for granted on a daily basis really is.  Many of the hardest hit areas Read more…

Either way this election turns out, American jobs are going to continue to get slaughtered by the millions.  During this campaign, Mitt Romney and Barack Obama have both attempted to portray Read more…

Small cap and mid-cap stocks and ETFs have been known to be at the forefront of growth during times of economic recoveries, and over the past few months, they have been leaving large caps in the dust. 

In fact, historical data shows that small-cap stocks have outperformed their large-cap counterparts during three of the past five recessions, while mid-cap stocks have outperformed their large-cap counterparts in each of the past five recessions.  A major reason behind this outperformance is due to the flexibility and nimbleness of small and mod-cap companies.  These companies are generally able to quickly ramp up headcount and production as the economy improves, which further enables them to take advantage of a growing environment and produce gains in revenue and earnings. 

A second force which enables small and mid-caps to outperform large-caps is the inherent performance boost they witness when mergers and acquisitions activity increases as valuations become favorable and larger companies with excess cash on their balance sheets look for ways to expand their businesses. Lastly, small and mid-cap companies generally are riskier than large-caps and therefore witness higher returns and are more susceptible to positive price support in the early stages of an economic recovery.

Some ETFs influenced by this phenomenon include:

• PowerShares Dynamic Small Cap (PJM), which is up 27% over the last year.
• Vanguard Small-Cap ETF (VBR), which is up nearly 25% over the last year.
• S&P Mid-Cap 400 SPDR ETF (MDY), which is up nearly 28% over the last year.
• iShares Russell Midcap Index Fund (IWR), which is up nearly 26% over the last year.

Disclosure: No Positions

Read more here:
Three Reasons Small & Mid-Cap ETFs Are Outperforming

HERE IS YOUR FOOTER

Investors hear a lot of talk about index funds and diversifying risk. And on its face, diversification seems like a reasonable strategy for long-term investing.

I disagree.

As a matter of fact, I've found that the opposite is true. Sometimes it's best to ignore Wall Street.

If you have a clear strategy and can focus on specific types of stocks, you can beat the “slow and steady wins the race” strategy without resorting to trading or aggressive bets.

The other problem with traditional buy-and-hold strategies in this type of market is they just doesn't work. Stocks have run and fallen so many times that if they were a little boy he'd be wrapped head to toe in bandages.

The S&P 500, the poster child of a diversified portfolio of quality stocks, has a three-year average annualized return of -6.2%. That's not exactly going to get your retirement nest egg comfortably fluffy.

You can either continue to extend the long-term diversification mantra “it will be fine over time,” or you can focus like a laser beam on quality opportunities and stick with them until they run their course.

Here's the approach I take in Stock of the Month:

• Compare each holding to the performance of the S&P 500. When I select an investment, one of my primary goals is to outperform the market. A security could be up or down since I purchased it. But I want to specifically know whether my assumptions about its potential to outperform the market were sound.

• Review and assess any negative material changes for each of my holdings. Before I buy a security, I nearly research it to death. I assess its opportunity to outperform based on its fundamentals, competition, financials and economic trends. But conditions change. In a downturn, I take a harsher view of anything new that is liable to negatively impact performance.

• Search for the new silver linings. No matter how dark a market storm cloud, there are always opportunities. Revisit your watch list. Sometimes I can find an underpriced chestnut. Sometimes I can find an investment that outperforms in stormy weather.

Because I follow this approach, on average, my open positions are outperforming the S&P 500 by more than 10 percentage points.

Two other trends are working in my focused favor:

1. Companies are now sitting on high levels of cash. During the recession, companies battened down the hatches, cut costs and paid down debt. As a result, company balance sheets are healthy. The non-financial companies in the S&P 500 are sitting on $837 billion in cash — which is much higher than normal and 26% more than they had last year. And that's just a subset of the S&P 500. Overall, $3 trillion of cash is sitting on company balance sheets.

But cash on the balance sheet doesn't help a company grow. Companies could hire more employees to expand their businesses, but so far that has not been a course they have been willing to take. They could buy existing businesses with strong growth potential. And that appears to be the case.

Small companies are still having problems borrowing money to expand their businesses. Lenders, however, are very comfortable loaning money to big companies with strong balance sheets. Therefore, marriages between big and small companies seem like matches made in financial heaven.

2. Merger activity is heating up. August is usually a slow month for deals. But the pace of mergers and acquisitions this month is set to be the highest of the year.

Global takeovers exceed $1.3 trillion so far this year, up almost +25% from the same time last year. That's great news for funds that profit from Wall Street's deal making. What's even better is that these funds tend to be steady growers. While they may lag a little in raging bull markets, they consistently outperform in inconsistent or bear markets.

Action to Take –> One of my recent portfolio additions is a fund that takes advantage of this M&A trend. It's typical of searching out timely opportunities and holding them just long enough to get every last ounce of profit from them and then move on. But because I'm buying trends and not earnings or story stocks, these are investments, not trades.

I take what market will give me, and right now, playing the “hold-and-hope” game just isn't working. But I've found a strategy that is.

Investors hear a lot of talk about index funds and diversifying risk. And on its face, diversification seems like a reasonable strategy for long-term investing.

I disagree.

As a matter of fact, I've found that the opposite is true. Sometimes it's best to ignore Wall Street.

If you have a clear strategy and can focus on specific types of stocks, you can beat the “slow and steady wins the race” strategy without resorting to trading or aggressive bets.

The other problem with traditional buy-and-hold strategies in this type of market is they just doesn't work. Stocks have run and fallen so many times that if they were a little boy he'd be wrapped head to toe in bandages.

The S&P 500, the poster child of a diversified portfolio of quality stocks, has a three-year average annualized return of -6.2%. That's not exactly going to get your retirement nest egg comfortably fluffy.

You can either continue to extend the long-term diversification mantra “it will be fine over time,” or you can focus like a laser beam on quality opportunities and stick with them until they run their course.

Here's the approach I take in Stock of the Month:

• Compare each holding to the performance of the S&P 500. When I select an investment, one of my primary goals is to outperform the market. A security could be up or down since I purchased it. But I want to specifically know whether my assumptions about its potential to outperform the market were sound.

• Review and assess any negative material changes for each of my holdings. Before I buy a security, I nearly research it to death. I assess its opportunity to outperform based on its fundamentals, competition, financials and economic trends. But conditions change. In a downturn, I take a harsher view of anything new that is liable to negatively impact performance.

• Search for the new silver linings. No matter how dark a market storm cloud, there are always opportunities. Revisit your watch list. Sometimes I can find an underpriced chestnut. Sometimes I can find an investment that outperforms in stormy weather.

Because I follow this approach, on average, my open positions are outperforming the S&P 500 by more than 10 percentage points.

Two other trends are working in my focused favor:

1. Companies are now sitting on high levels of cash. During the recession, companies battened down the hatches, cut costs and paid down debt. As a result, company balance sheets are healthy. The non-financial companies in the S&P 500 are sitting on $837 billion in cash — which is much higher than normal and 26% more than they had last year. And that's just a subset of the S&P 500. Overall, $3 trillion of cash is sitting on company balance sheets.

But cash on the balance sheet doesn't help a company grow. Companies could hire more employees to expand their businesses, but so far that has not been a course they have been willing to take. They could buy existing businesses with strong growth potential. And that appears to be the case.

Small companies are still having problems borrowing money to expand their businesses. Lenders, however, are very comfortable loaning money to big companies with strong balance sheets. Therefore, marriages between big and small companies seem like matches made in financial heaven.

2. Merger activity is heating up. August is usually a slow month for deals. But the pace of mergers and acquisitions this month is set to be the highest of the year.

Global takeovers exceed $1.3 trillion so far this year, up almost +25% from the same time last year. That's great news for funds that profit from Wall Street's deal making. What's even better is that these funds tend to be steady growers. While they may lag a little in raging bull markets, they consistently outperform in inconsistent or bear markets.

Action to Take –> One of my recent portfolio additions is a fund that takes advantage of this M&A trend. It's typical of searching out timely opportunities and holding them just long enough to get every last ounce of profit from them and then move on. But because I'm buying trends and not earnings or story stocks, these are investments, not trades.

I take what market will give me, and right now, playing the “hold-and-hope” game just isn't working. But I've found a strategy that is.

Dow…3 ounces!

Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland’s biggest bank, Anglo Irish. And now they’re going broke. The losses are probably more than they can handle.

But it’s been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they’re back to being the poorest…

It would have been better if they had had a better sense of architecture during the fat years… They wouldn’t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations…

Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots…

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There’s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven’t given up. They’re still eager to buy – at the right price.

But just wait. When the end comes…they won’t be interested at any price. Some of the finest properties will go “no bid.” Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It’s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the “recovery” comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up “in the long run.” These super bulls are forever predicting “Dow 36,000” or “Dow 100,000.” And they’ll probably be right. Someday, the Dow will probably hit 100,000. And you’ll be able to read about it in your $50 newspaper while you’re drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he’ll be right too.

But stocks don’t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let’s say you “buy the market.” You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren’t they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can’t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can’t really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its “price” – in terms of how much you could exchange in for – has been more or less constant.

If stocks were really becoming more valuable you’d expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. “A $20 gold piece” was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the ’30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in ’82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the ’10s…again in the ’20s…the ’30s…the ’40s…the ’50s…’70s…’80s…and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha….

Bill Bonner
for The Daily Reckoning

How to Make Real Money in Real Estate and Other Investments originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
How to Make Real Money in Real Estate and Other Investments

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Dow…3 ounces!

Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland’s biggest bank, Anglo Irish. And now they’re going broke. The losses are probably more than they can handle.

But it’s been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they’re back to being the poorest…

It would have been better if they had had a better sense of architecture during the fat years… They wouldn’t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations…

Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots…

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There’s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven’t given up. They’re still eager to buy – at the right price.

But just wait. When the end comes…they won’t be interested at any price. Some of the finest properties will go “no bid.” Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It’s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the “recovery” comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up “in the long run.” These super bulls are forever predicting “Dow 36,000” or “Dow 100,000.” And they’ll probably be right. Someday, the Dow will probably hit 100,000. And you’ll be able to read about it in your $50 newspaper while you’re drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he’ll be right too.

But stocks don’t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let’s say you “buy the market.” You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren’t they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can’t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can’t really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its “price” – in terms of how much you could exchange in for – has been more or less constant.

If stocks were really becoming more valuable you’d expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. “A $20 gold piece” was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the ’30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in ’82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the ’10s…again in the ’20s…the ’30s…the ’40s…the ’50s…’70s…’80s…and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha….

Bill Bonner
for The Daily Reckoning

How to Make Real Money in Real Estate and Other Investments originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
How to Make Real Money in Real Estate and Other Investments

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.