If you havn’t already evaluated where your business stands in this tough economy, now is a good time to get started.  To get started, rreview how and what has changed within your business over the last few quarters.  How has sales changed?  Are expenses still in line with your budget targets?  How much cash is in your reserves?  Here are five ways to recession proof your business.

1) Get help with the things that are important.  For example, if you need help with how the recession will affect your industry, seek out consultants who can help with the answer.  Look for new ideas regarding what is most important to your customer that they will not forego in tough times.

2) Focus on profitability not just cost cutting.  Look at how to improve your profitabily first.  This may be a situation where your cost will increase due to more expenses such as more marketing to grow sales.  If you need to cut cost, do so in the non-critical areas of your business.

3) Monitor your cash flow to steady the ship during rough waters.  Evaluate your company’s cash reserve trend over the last few years.  Calculate how many days of cash you have in your business and set a target of how much cash to keep in reserves.  Determine your monthly expenses and divide this number into total cash in reserves.  This will tell you how many days your business can operate using your cash only.  This is the real strength of your company when sales get tough.

4) Evaluate the creation of new products or services to add new sales.  You may want to survey your existing customers to better understand what they need or want to add to your products.  How many uses have been defined for baking soda, velcro binding and other common products.  You can think about how to extend your product line.

5) Try to smooth out your income streams.  You may want to look at opportunities that provide continuity revenues such as subscripyions, memberships and other ways to generate a more consistant type of revenue.  Also, look at bundling several products inyo a package to increase total revenue per sale.

This another heart warming story of a lady who purchased stock in 1935 and let if grow into a $7 million fortune over a 75 year period.  Of course, she lived a very simple life and saved her money over this time period.  If you have another 75 years, this is one way to be a millionaire.

Grace Groner was incredibly reserved with her money, a result of living through the Great Depression. Groner chose to buy her clothes from rummage sales rather than stores.  She chose to walk everywhere rather than buy a car.  Her home was furnished with a few simple pieces of furniture.  And her TV was an outdated giant that makes anyone’s in America seem like state-of-the-art.   What’s the catch?

Well Grace Groner wasn’t exactly counting pennies it was more of a personal choice for her. In 1935 she purchased three shares of Abbott Labs stock for $180 which turned into a grand total of $7 million today.

Her one out of the ordinary blip in spending was a scholarship program she created for Lake Forest College, her alma mater.  She had told the school that she planned to donate more once she passed away.  In January, at the age of 100, Groner passed away and her attorney informed the college president that she had left her fortune to the school.

“She did not have the material needs that other people have,” said William Marlatt, her attorney and longtime friend. “She could have lived in any house in Lake Forest but she chose not to … She enjoyed other people, and every friend she had was a friend for who she was.  They weren’t friends for what she had.”

See Youtube video of Grace Groner

If you really want to achieve financial independence or to retire from the rat race, you must have some type of income to sustain your lifestyle.  This is were you transition from active income from employment to passive income from investments.   The idea behind passive income is that it is income earned repetitively from a one-time project or it takes little time to acquire on a regular basis.  The sooner you start building passive income sources the sooner you will become financial independent.

The most common passive income sources include:

• Investments in stocks and bond that pay dividends such as the ETFs listed in the monthly residual income program.  You can literally create any unlimited number of monthly paychecks through this process of investing.
• One of the more popular passive income today is selling options to collect the premium as a source of income.  This includes covered call, credit spread, butterflys and condor option strategies.
• You can buy and rent real estate such as single family dwellings, apartments and so forth.  This can be a great strategy if you like the real estate industry.
• You can earn royalty payments from published books, music and other types of intellectual property.  This can include passive income from blogs, affiliate income, etc.
• Residual income from companies you have an ownership in but do not participate in the daily management of the business.
• The most obvious is pensions and retirement accounts such as 401K’s.  Of course, these items usually require 30-40 years of employment before they come to fruition.

In general, there is two types of passive income: income generated from nearly no capital and income requiring significant amount of capital.  If you write a book or create music it doesn’t require a lot of startup capital.  If you want to invest in a business then you must have access to a significant amount of cash.

The most common path is to begin building passive income assets while being primarily employed at a job.  This approach allows you to save cash for passive income investing without struggling to make your life standard.   This approach allows for time to grow and compound your passive income into a larger source of income.

My preferred method is discussed in the Get Rich - Stay Rich program.  Here I split my investments into two buckets.  One bucket consists of 60% of my portfolio that I call the Stay Rich bucket.  I include safe investments such as monthly dividend payers in this low-risk portion of my portfolio.  The second bucket is called Get Rich as I take on a little more risk to earn a higher return.  this strategy includes covered calls, spread trading and condor trades.  All of these strategies pay me a premium or credit as a form of passive income.  Over time, I transfer my Get Rich money into more secure Stay Rich passive income sources.

The biggest distinction between the rich and working classes is that the rich focus on projects that continue to pay dividends for life (residual income) while the working class focus on earning a single paycheck.  Simply, the rich look to do a project once and get paid over and over for that one project.  For example, the rich may invest in a hotel that pays them a recurring income for years.  Or they may invest in equities such as monthly dividend payers that will pay then a dividend check each month.  The major point is to create investments with one-time efforts.

Secondly, the rich society often diversifies their income streams across different asset classes.  They may own stocks, bonds, real estate, intellectual property, retail companies and other types of income generators.  You may not start with a list of assets but you will want to expand your horizons with income from multiple sources.  You wouldn’t invest all your worth in one stock so don’t depend on one income stream for a lifetime of income.

What is your most valuable asset?  This may be a trick question but the answer is your TIME.  If you think about it, one a minute goes by you can never get it back.  If you incur a profit loss on a project, you learn a lesson and go on to the next project.  But with your time, you can never get it back again.  The rich know this theory very well.  They prefer to make money with passive income rather than active income.  Passive income doesn’t require you to be actively involved in earning this income.  In comparison, the working class trade their time for money through a job.  The rich invest their capital to make passive income so they can free up their time for other pursuits in life.

We will discuss passive income in more detail in future posts.

Investors were generally unmoved by the revised fourth quarter GDP numbers.  The headline growth rate was upwardly revised to reflect 5.9% annualized growth rate, which exceeded expectations, but the personal consumption component increased at a softer-than-expected clip of 1.7%.  Core personal consumption expenditures increased at a faster-than-expected quarter-over-quarter clip of 1.6%, though.

Existing home sales for January made a surprise 7.2% month-over-month drop to an annualized rate of 5.05 million units. Meanwhile, the final February Consumer Sentiment Survey from University of Michigan was little changed at 73.6 and in-line with expectations.

As you know from previous posts, the fund of Funds Portfolio was in cash all of February.  With a small market gain of 2.8%, all was not lost being out of the market.  To update for March, we have two asset categories to enter.  The first is Vanguard REIT Index (VNQ) which crossed above its 100-day moving average in February.  This fund has a year to date market return of 13.65%.  The second  FOF asset to enter is the Vanguard Small cap Index (VB) which is up 22.6% YTD.  Both of these funds are showing out timing indicator to re-enter with 20% of your FOF Portfolio in each position.  The other 60% of this portfolio should be in cash or maney market positions until the end of March.

Details of the Fund of Funds Portfolio is here.

Oil and gas drilling company Helmerich, which is a constituent of the S&P MidCap 400, will be replaced by Prosperity Bancshares Inc., a retail and commercial banker. Helmerich is based in Tulsa, Okla.

Prosperity, a Houston-based member of the S&P SmallCap 600, will be replaced by Interactive Intelligence Inc. Interactive Intelligence, based in Indianapolis, makes software for Internet telephone communications.

Looking at the Rydex Precious Metal Fund (RYMDX), it peaked at $73 in early December and has fallen to near $55 by February (see chart below).  This is about a 33% decline in just two months.  Gold stocks have experienced a significant sell off.   This market is acting very different that what one would expect.  Generally, when interest rates increase, gold will fall.  But this did not happened when the Fed Rate was increased last week.   This is a good sign for gold.  The real rationale is that the eurodollar is so hated that investors have two safe choices: U.S. Dollar and gold.  The US Dollar will continue to be strong as long as Europe is in a debt crisis.  And gold will get a nice bounce from money leaving the euro.

In addition, I have not been seeing the awful television commercial about buying and selling gold.  This is an indication that it may be time to get back into gold.  Since the gold stocks were taken down, I want to use them for a rebound.   The real value is that gold stocks are cheap compared to the price of gold.  This eventually must be corrected by gold stocks increasing in value.

I am more inclined to buy the GDX rather than GLD at this time because I think this is were the bigger increase will be (on the stock side).  If you agree, buy into the GDX and use a trailing stop for protection.

RYPMX has crossed above its 200 day average

You must keep in mind that this is a contrarian trade.  The monthly trade to go long those currency’s rank near the bottom of the leadership board.  This is the typical pattern reversal trade. You could also go short the currency’s ranked at the top of the leaderboard.

Following this strategy, you want to go long the Brazilian Real, Russian Ruble and the Canadian Dollar.  I would stay short the Eurodollar until the debt crisis with Greece and the PIGs starts to improve.  The currencies at the top - Japenese Yen, Bristish Pound and Australian Dollar are potential short candidates.  the Yen moved from 17th place to 1st in one month while the Pound moved from 14th to 3rd.  These currencies are no likely to stay at the top with such a sudden move.  Both the Yen and Pound are near their 52-week highs. 

You can find the original post of Forex Currency strategy here. 

Forex trading Strategy by Master Achievement

The other troubling issue, from my perspective, is the breadth of the correction.  Today, no single country ETF has an RSI reading above 60,  this does not happen very often so it may be a negative market signal.  Both Japan (EWJ) and Singapore (EWS) have relative strengths just above 50.  All other country ETFs are below 50 in strength.  As many of you know, there is always a bull market somewhere but they are difficult to find at this time.

I am still in cash in my 401 accounts,  I do have positions that are long the US Dollar (UUP) and short the Eurodollar.  This trend will continue until the european debt issue is solved.  Then, the US Dollar will break down again.  I am short the Nasdaq QQQQ using the QID.  Also, I have added some shares of monthly dividend payers on the pull back because their yields had a slight spike.

It is still a time to be cautious in the stock markets.

Updating the asset ETFs in the portfolio, they still have positive returns averaged over the 3, 6 and 12 nonths periods.  However, the downturn during the final two weeks of january moved the top five ETFs below their 100-day moving averages.  this is a warning sign that volitility may be returning to the market.  Following the rules, you should move to 100% Cash or Money Market accounts throughout February.  We will update the FOF Portfolio in March after the markets have time to get through their correction.

February 2010 Update - Master Achievement

Rules for FOF Portfolio

1. Rank the 12 asset classes by taking an average of each Funds 3-month, 6-month and 12- month performance.  The sort with the highest average at the top of the list (see table).
2. Evaluate the top 5 Funds on the ranked list to ensure each Fund is trading about its 100-day simple moving average.
3. Invest 20% of your portfolio in each Fund ranked 1 to 5 and above its 100-day trading price based on last closing price.
4. in the event that a Fund is trading below its 100-day price, do not invest in that Fund.  there may be a period when you are not 100% invested due to market volitility.  This is part of the strategy of keeping your money out of a dangerour market to prevent loses (I.E. 4th quarter 2008).

Click here to see original Fund of Funds Portfolio.

Companies are obliged to issue such statements when holdings exceed 3 percent. Munich Re declined to say whether Buffett had owned any shares before bringing his stake above 3 percent.  Munich Re is one of the world’s biggest reinsurance companies, selling backup coverage to other insurers, spreading risk in the event of huge losses.

Natural catastrophe losses were far lower in 2009 than in 2008 due to the absence on the whole of major catastrophes and a very benign North Atlantic hurricane season.  However, the total number of destructive natural hazard events was above the long-term average, 850 being recorded in all.  Consequently, despite the lack of really disastrous events, there were substantial economic losses of US$ 50bn and insured losses amounted to US$ 22bn compared with economic losses of US$ 200bn and insured losses of US$ 50bn in the previous year.

Billionaire investor Buffett has been a shareholder in Munich Re since at least 2008.  Munich Re Chief Executive Officer Nikolaus von Bomhard told shareholders at the annual meeting in Munich that year that he expected Buffett to remain a shareholder in the company.  At the time, Buffett’s stake was below the 3 percent threshold, the lowest that requires disclosure.

Buffett’s Berkshire held 3 percent of Swiss Re as of March 2009, data compiled by Bloomberg show.  The Zurich-based reinsurer is increasing surplus capital as it bids to regain its AA credit rating and repay 3 billion francs ($2.87 billion), which Buffett injected into the company last February.

ETFs in Fund of Funds Portfolio

1. Rank the 12 asset classes by taking an average of each Funds 3-month, 6-month and 12- month performance.  The sort with the highest average at the top of the list (see table).
2. Evaluate the top 5 Funds on the ranked list to ensure each Fund is trading about its 100-day simple moving average.
3. Invest 20% of your portfolio in each Fund ranked 1 to 5 and above its 100-day trading price based on last closing price.
4. in the event that a Fund is trading below its 100-day price, do not invest in that Fund.  there may be a period when you are not 100% invested due to market volitility.  This is part of the strategy of keeping your money out of a dangerour market to prevent loses (I.E. 4th quarter 2008).
5. At the begining of each month, update the ranking of each fund by calculating the new return average and then sort with highest average return at top.
6. If any invested funds fall from the top 5 ranking, then sell this fund and replace it with the new fund in the top five ranking.  The strategy is to be invested in the top 5 asset classes that trade above their 100-day moving average.
7. If any Funds you are invested in fall below their 100-day average, then you will exit that Fund.  You do not need to monitor the 100-day on a daily basis.  Check this measure at the beginning of each month as this will get you out of a declining fund without any whipsaw movements.
8. Continue to monitor your portfolio at the beginning of each month to update ranking and best Funds to be invested in.
9. At year end, you can rebalance your investment amounts to return to 20% in each Fund.  Make this an easy time such as the beginning of January.  If you have a Fund that increases in value through the year, let the profits run unless; (1) the price drops below the 100-day average; (2) the Fund drops out of the top 5 ranking; or (3) you rebalance at the beginning of the year taking the Funds balance back to 20%.

There are a number of ways to play this trend.  You could invest in natural gas to play the price of the commodity with UNG.  I do not like this as there is a large supply of natural gas in the U.S.  secondly, you could play the utilities that use natural gas to generate electricty,  This is a good option that appears to be safe over the next 10 years.  A third option is to invest in the midstream natural gas players.  These are the companies that process, store and transport natural gas.  These companies are generally listed as master limited partnerships ot MLPs. 

My favorite way to play this trend is with an ETF:  Fiduciary/Claymore MLP Opportunity Fund (FMO).  This is not a pure-play on natural gas but you get exposure to all pipelines that are a tgoll-road investment.  FMO had a return of 60% in 2009.  It pays a quarterly dividend with a yield of 7.5%.  FMO trades at $18 per share which is a 12% premium to its NAV.  This is an attractive, total return investment for long-term investors.  FMO is 42% invested in midstream gas and 40% invested in midstream oil.  These pipelines will continue to generate cash as long as there is demand for energy.

The preferred tax treatment of MLPs is an added benefit to recieving cash disvidends as these are frequently classified as return of capital which lowers your taxable cost basis.

TOP 10 HOLINGS
as of 11/30/09

The income component is generated by the sell of covered calls against the Fund’s holdings.  GGN pay a monthly dividend of $0.14 for an annual dividend of $1.68.  Trading at $16.00 per share, the annual dividend yield is 10.5%.  As of December 29, 2009 the fund has a one-year return of 78.2% but only sells at a 3% premium to its NAV.  Over the Fund’s four year history, the range fluctuated from a 56% premium in January 2009 to a  10% discount in April 2008.  GGN has a market cap of $350 million with an expense ratio of 1.28%.  The Fund has a preferred stock (GGNpA) that trades at $25.50 with a yield of 6.5% paid quarterly.

In contrast, Bloomberg quoted Nouriel Roubini as saying the idea of gold going to $2,000 per ounce was “utter nonsense”. Maybe $1,100 or so, says Roubini, but that’s about it.

Regardless of which expert may be correct, I want to receive the 10.5% dividend yield from GGN to protect my downside and still have room for some upside movement.  

The increased demand from China, along with the beginning of supply chain restocking by the United States and other western economies, led to the increase in demand that drove metals prices up during 2009.  As restocking continues and Chinese demand is prolonged, a floor should be maintained on industrial commodity prices.  As gold continues to reach new highs, the related equities offer upside in the price of the metal.  If gold stays above $1,000 per ounce, the mining companies should begin to realize meaningful cash flow, which will accrue to the benefit of shareholders, and gold equities could enjoy a further upward move.