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Friday, July 29, 2005 | Dylan Jovine

On Wednesday I released our 
latest issue of our Monthly Fallen Angels Stock report, titled: 
"2005 Mid-Year Investment Outlook." 

Our resident stock trading Guru/Hedge fund manager Teeka Tiwari
thought he would add a dose of spice. 

Enjoy the cooking.


When it comes to investing, truer words have rarely been spoken. 

Case in point: On Wednesday I released our latest issue of our  Monthly Fallen Angels Stock report, titled: "2005 Mid Year Investment Outlook." In the report I share my views on what specific actions investors should be taking to protect their hard earned assets against the strong likelihood of recession.

(Note: To become a member of the one family that counts  and read the report in full, visit us here: ) 

That doesn't mean I'm overly bearish. Nor does it mean I'm bullish.It's just that for the first time in 25 years, the two most  reliable economic indicators in U.S. history are both pointing  toward recession: 


"Recession Indicator #1: Inverted Yield Curve 

You've undoubtedly heard the old joke about placing ten  economists in a room and getting fourteen different answers. 

Well, there is a caveat to that joke: If you asked ten economists  to choose the one 'signal' throughout history that was the most  reliable predictor of recession, most, if not all of them, would  point to an inverted yield curve. 

The yield curve itself describes the relationship between  interest rates on long-term and short-term U.S. government bonds.  Interest rates on the shortest-term bonds correlate very closely  with the interest rates set by the Federal Reserve Board. 

Long- term interest rates, by contrast, are influenced by  many more factors, ranging from China's purchase of debt to  investors' optimism about inflation and growth. 

Typically, bonds that mature further in the future pay higher  yields -- compensation for the risk of locking up money for a  longer period. 

Why Fed Chairman Greenspan is Sweating 

When the difference between long-term and short-term interest  rates is large, the yield curve is said to be steep. It's on  'steep' yield curves where people who buy long-term bonds get  paid higher rates than people who buy short-term bonds. 

But when long-term rates are lower than the short-term rates,  it's inverted. An Inverted Yield Curve can lead to a situation  where an investor who buys a 30-year bond gets a lower return  than one who buys a 10-year bond. 

Yield curves which are inverted are indeed very rare and very  troubling. They're rare because it's only happened eight times  in the past century. They're troubling, because they've  predicted recession correctly seven of the eight times  (87.5% accuracy). 

Recession Indicator #2: Outrageous Private Sector Borrowing 

If we were to bring the same group of ten economists back  into the room together (if we could stand the bickering) and  ask them what they would pick as their second most reliable  indicator for recession, most would say Private Sector  Borrowing. 

Private Sector Borrowing shows how much the private sector in  the U.S. -- corporations and people -- spend versus save. If the Private Sector is saving more than borrowing, then it's  in surplus and has money for a rainy day. Conversely, if  the Private Sector borrows more money than it saves, then it  is in deficit and has no money for that rainy day. 

**From 1960 to 2000, America's Private Sector always saved  more than it borrowed. That changed in 2000, when, at  the height of the telecommunications/internet boom, U.S.  companies and households borrowed $600 billion more  than they saved! 

**After the recession of 2000, the private sector got its house back in order and cut spending sharply. So much so  that just last year, the private sector was back at  even -- both U.S. companies and consumers were saving as  much as they borrowed. 

**But that changed sharply this year as Private Sector  net borrowing ballooned. It's currently on pace to reach  $400 billion or 4% of GDP this year. 

What makes this time different -- and so alarming, quite  frankly -- is that consumers are responsible for most of the  borrowing this time, as opposed to corporations who shouldered  much of the blame last time. In fact, corporations have been so diligent this time, that  they're actually in surplus: they're saving more of their  profits than they're spending. 

Where is this binge of borrowing coming from, you ask? You guessed it: The 2nd and 3rd mortgages that your friends  and neighbors are taking out as they speculate on the wild  rise in real estate prices. 

And though I am vehemently opposed to it, it's not hard to see  why the government passed the bankruptcy bill: As a measure to  make people think twice about the absurd levels of debt they're  carrying. 

At some point, consumers are going to have to pay the piper. Unfortunately, history suggests that the ripple effect  will likely cause a sharp economic downturn."


"While it's hard to argue with history, one thing experience has taught me is that there's always a Bull Market Going on  Somewhere.

Dylan talks about inverted yield curves, housing bubbles etc.,  and he's right - an inverted yield curve is, without question, a  sign of interesting times to come as will be the massive growth  in consumer debt and housing values.

Notice I said “interesting times”, not necessarily bad times. 

No, No, No my friends; you see when the proverbial “spaghetti”  hits the fan is when the opportunity to make huge, and I MEAN  HUGE, money presents itself. 

Values get out of whack; option premium volatility goes through  the ROOF. All of which, with the right guidance, can spell 

M-A-S-S-I-V-E P-R-O-F-I-T-S!!!

Do you know when my most profitable period in the market was?  It was between 2000 - 2003!! Those three years were an absolute  bloodbath for most investors, but for us it was the easiest and  biggest money we ever made.


Because when people panic. they do stupid things. They sell  stocks with no regard to value. They buy stocks with no regard  to value. In short, they become emotional, and in this business  emotions will put you in the poor house quicker than trying to  short Google!

Just ask Dylan. Right on the eve of the Iraq war, investors were running for the hills, and we both had our best year ever!

There's an old saying in this business – 

“Bulls make money, Bears make money, but Pigs get slaughtered”

I’d like to add my own little twist to that – 

“Bulls make money, Bears make money, Pigs sometimes make money,  BUT SHEEP ALWAYS GET SLAUGHTERED”

Don’t be a Sheep! 

And don’t fear the future. We are blessed to live in the greatest  country in the world. Whatever comes down the economic pike, I  absolutely guarantee you that their will ALWAYS be a way for you  to profit from it.

If you're not profiting from it, rest assured both Dylan and  I will be!" 

To find out exactly what to buy/sell/hold and visit us here: 

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Dylan Jovine
CEO, Founder & Director of Editorial Content
The Tycoon Report
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