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How to Protect Your Portfolio from the Next Panic

By Tom Dyson, publisher, The Palm Beach Letter
Monday, May 24, 2010

You've probably heard there's a volcano erupting in Iceland.
 
This volcano started erupting in early April. It sent such a large cloud of ash into the atmosphere, it stopped all European air travel for five days and is still causing disruption.
 
The last three times this volcano erupted, another volcano, 15 miles to the east, erupted too. That volcano, named Katla, is far bigger. It is one of the most powerful volcanoes in the world. According to Britain's Daily Telegraph, Katla has "some ten times the power" of its little sister.
 
According to the Institute of Earth Sciences, Katla averages two eruptions per century. It hasn't erupted in the last 92 years, so an eruption from Katla is overdue.
 
Iceland's president, Olafur Grimsson, recently told the BBC he expects Katla to erupt at any moment. He says it's not a matter of "if" but "when." Iceland's government has issued emergency evacuation plans to the population.
 
Now, I have no idea whether Katla is going to blow or not. It seems unlikely, given it only happens twice a century. Likewise, I don't expect any imminent nuclear bomb attacks in Los Angeles... or meteor strikes in Shanghai...
 
But I'm preparing my newsletter's portfolio to withstand these risks anyway.
 
Yesterday, the government passed the Financial Regulation Act. This month, regulators expanded their investigation into Wall Street fraud. Oil is leaking into the Gulf of Mexico. Confidence in the euro has evaporated. Stock and commodity markets are plummeting.
 
The point is: your investments face extraordinary risks right now. The volcano is simply another one you can add to the list.
 
With the stock market up 50% in the last year, trading at overvalued levels in terms of 10-year adjusted P/E levels, and paying historically low dividend yields, you're not being fairly paid to take these risks.
 
That's why I'm recommending you avoid stocks right now... and put your money into much safer alternatives. Fixed-income investments are one idea I've suggested to my 12% Letter readers. Instead of buying ownership in companies, we're lending them money. In return, these companies have a legal obligation to return our money in full, with dividends, when the loan matures.
 
We only lend money to companies with rock-solid balance sheets. By investing this way, we're able to generate 8% annual income at much lower risk levels than we'd have to take in the stock market. You read that right... you can generate 8% in annual income, safely, by following my recommended loan strategy.
 
The best part is, these fixed-income investments trade on the New York Stock Exchange, the Nasdaq, and the Amex and you can buy and sell them as if they were stocks. They call these securities "exchange traded fixed income securities" and over a thousand of them trade on the stock market.
 
For instance, last year we loaned money to Entergy, an electric utility in Texas. Our investment trades on the NYSE under the symbol EDT. It pays 7.88%, it matures in 2039, and a power plant property secures our loan. We've made 12% returns in less than a year from this investment.
 
If Iceland's most dangerous volcano erupts... or if any of the other risks I've just described turn into reality... stock market investors will suffer the worst in the ensuing panic. By sticking with my safe loan strategy, you make sure you're out of that crowd.
 
Good investing,
 
Tom




Further Reading:

One potential disaster we're keeping an eye out for is a "hot" conflict in Iran... More than 40% of the world's daily oil consumption travels through the Strait of Hormuz, which borders one of the world's most belligerent governments. Any threat to sea traffic there, and the oil price would rocket higher, crushing investors and consumers alike.

You can get details on the situation here: The Giant Financial Risk You'll Never Hear About on Television. And get our best idea for the easiest way to protect yourself here: How Rich Investors Buy Insurance.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Volatility (VIX)... we warned you!

NEW LOWS OF NOTE LAST WEEK
 
Nokia (NOK)... cell phones
Arena Pharmaceuticals (ARNA)... obesity drugs
Baxter International (BAX)... health care
Gilead Sciences (GILD)... biotechnology
Force Protection (FRPT)... military contractor
PowerShares Agriculture ETF (DBA)... grain fund
Bunge (BG)... grain processing
CF Industries (CF)... fertilizer
Chemical & Mining of Chile (SQM)... largest lithium producer
Ener1 (HEV)... lithium batteries
Diamond Offshore (DO)... offshore drilling
Hercules Offshore (HERO)... offshore drilling
British Petroleum (BP)... offshore spilling
Transocean (RIG)... deepwater drilling
Cal Dive Inte'l (DVR)... offshore drilling infrastructure
Seadrill Limited (SDRL)... just the name is enough reason to sell it
Euro, British pound, Shanghai Composite

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