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Dear Daily Crux reader, This week's interview is for the income-focused readers of The Daily Crux. Our guest is Tom Dyson, editor of one of the world's most popular investment income advisories, The 12% Letter. In just the past few years, Tom has directed his readers to huge income payouts with investment vehicles most advisors haven't even heard about. As you'll learn in a moment, Tom is super bearish on the stock market right now. But that doesn't mean you can't collect high income from the safe investments he's recommending to his readers. Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com –––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview The three best places to earn safe income right now The Daily Crux: Tom, you've been bearish for many months now. But since the last time we talked in March, the market made a brief new high and has been heading lower ever since. It's looking more and more like the downturn you've been expecting could be here. Can you give us an update on your thoughts? Tom Dyson: Well, that's right... though I wasn't calling for just a downturn, I was calling for a resumption in the big bear market trend that began in 2007, or arguably even 2000. The bear market we saw was caused by a world that had way too much credit and not enough resources to pay interest on that credit. What we saw was the beginning of a big liquidation where consumers stop consuming so much and producers stop producing so much. To put it very simply, the world economy contracted. ------------- Advertisement ------------ Receive our new book, free of charge (You pay only $5 for shipping and handling.) At Stansberry & Associates Investment Research, we have recently published what could be the most valuable book in America today. And we'd like to send you this book, free of charge. All we ask is that you pay $5 to cover the costs of shipping and handling. Click here for the full details. ------------------------------------------- And I realize this differs from the opinions of many economists, but I interpreted the rally that began in March 2009 to be a countertrend rally – rather than the end of the bear market. It was just a normal bounce that was supercharged by massive short-covering and stimulus from the government. It's not abnormal... markets don't move in one direction all at once. Despite the big drops in 2008 and early 2009, valuations never really got cheap. They got down to somewhere around fair value at the bottom in March 2009, but you didn't see the really cheap valuations you see at big market bottoms... so I've been expecting a return of the big bear market. I've been warning readers they should treat the rally as nothing more than a technical bounce in an ongoing bear market, and I've been telling them how to prepare for it for at least a year. And since many of my subscribers are income investors, I've been recommending the absolute safest ways to generate income in an environment of falling stocks and a contracting economy. Crux: Can you share some of the advice you've given your readers? Dyson: Absolutely. First and most importantly, I think people should keep a lot of cash on hand. I would guess that most people have far too little in cash savings. You really can't have too much cash right now. You should have your savings in cash or cash equivalents like short-term Treasury bills, and at least of few months worth of living expenses in cash on your property. By the way, I include gold coins as cash. Not the gold ETFs like GLD, not gold futures, not gold mining stocks... but rather physical gold on your property. That to me is the same as cash. At this point, I would prefer to have most of my cash in U.S. Dollars, but I definitely want to have a few gold coins. Now, this is near blasphemy for an investment analyst, but I think you should have a significant portion of investment money in cash or cash equivalents – like short-term Treasury bills – as well. I think most investors should keep most of their money away from the stock market right now. That's what I'm telling my family... the stock market is not the place for long-term savings today like it used to be. If you're a trader or full-time investor, great... there are all kinds of opportunities to go long, go short, to trade the volatility and make nice profits in this environment. We take advantage of those situations in my Penny Trends advisory. But if you're a retail investor, I really think you're best off keeping a big portion of your investment money in cash for the time being. Big money is going to be made by putting your money back into the market when it's at cheap valuations... when dividend yields have gone to 5% or 6%, when P/E ratios are in single digits, and the Dow and the S&P 500 are below the bottoms they made in March 2009. Until then I think cash is really the most valuable asset to own. Obviously, if you're an income investor you'll probably need to have more money in the markets, but you'll want to focus on only the absolute safest investments... the kind I've been recommending to readers of The 12% Letter. Crux: For the income investors who may be reading this, can you share some of your thoughts on finding safe income in this environment? Dyson: Well, my thought process has been a little different since the bear market started a couple of years ago. I never try to predict where the market's going to go. That's a fool's game. I may personally think it's going to fall, but I'm not trying to predict when or by how much. When I make a recommendation, I'm concerned with safety first. I'm assuming a worst-case scenario. And under the worst-case scenario, I've been telling my readers to buy three classes of stock. First, are select blue chip stocks. Right now, in our 12% Letter portfolio we're holding several blue chips. We have stocks like Coca-Cola, Altria, Johnson & Johnson, and Proctor & Gamble. If you look through my portfolio today you might think, “Wow, this guy's got to be bullish.” I mean, we own several of the stocks that make up the Dow Jones average. But the reality is we bought these stocks in November 2008 and January 2009 when the market had fallen about 50%. We picked them up when everyone else was selling. We made a fantastic trade. Not only did we buy these stocks, but at the same time we took advantage of the big volatility in the markets by selling put options against our holdings and brought in bucket loads of income. We were literally making 20% dividends on stocks like ExxonMobil, CocaCola, and McDonald's. It was unbelievable. It was one of the best opportunities I've ever seen to make income. The options we sold all expired worthless... so we got to keep that cash. And the market rallied almost 70%. So we made huge gains in the stocks too. Those stocks are still in our portfolio today, but many of them are getting close to hitting our 15% trailing stops. We continue to hold them, but most of them are not buys right now. Today, there are really only two blue chip strategies I'm recommending. The first is buying select blue chips through a unique dividend strategy I mentioned last time we talked. The other is buying what I consider the “bear market blue chips.” There are two of these special blue chips that I consider different from all the others. Those two stocks are Wal-Mart and McDonald's. These two companies sell products that people buy more of in recessions. They're the cheapest games in town to feed your family and buy the things you need... so when there's an economic contraction, Wal-Mart and McDonald's actually have higher sales. Just this week, McDonald's reported an increase in same store sales in its latest quarterly report. Both of these stocks rose during 2008, while the rest of the market fell 50%. That's really impressive. They're very defensive companies, and they continue raising their dividends. They've shown that they'll keep your money relatively safe even if the rest of the stock market falls, and you'll generate income to the tune of 2.5% or 3% a year that rises every year. ------------- Advertisement ------------ Have you heard of the Colorado "Gold Bank"? Since 2001, this unique bank has returned 1,667% for investors — yet it has nothing to do with a mining stock, ETF, or Mutual Fund. Barron's says: It "sets a blistering pace, far outshining the precious metal Gold itself and gold stocks..." Click here for the full details. ------------------------------------------- The second class of stocks I'm recommending are the preferred stocks of select companies that have enormous cash balances. A preferred stock is more like a bond than a typical stock. We're essentially lending money to these companies... companies that have so much money already they don't need our money and that won't go bankrupt in any kind of environment. These companies have billions of dollars on their balance sheet and no debt. They're in no danger of going bankrupt. And we're making 7% or 8% interest lending our money to them. Now we're not going to make any upside return... we've got no interest in the profits the company makes. We're simply lending them money for a very safe guaranteed yield. For example, one preferred stock we own is a Texas power utility called Entergy. They own nuclear plants, and it's one of the biggest utilities in the country. With that stock, we've basically bought the mortgage on one of Entergy's power plants, and we're getting 8% interest on it. In a worst-case scenario where Entergy can't pay us back, then we get a power plant... which will more than cover our loan. That's one example. The symbol on that one is EDT. The third class of stocks I'm recommending are insurance companies. Now I'm not buying just any insurance companies. Most insurance companies are loaded with the kind of bad debts that I'm worried are going to implode... municipal debt, mortgage debt, commercial debt, consumer debt. Wall Street's been selling that garbage for the last 10 years and many insurance companies have loaded up on it. But I've found three specific insurance companies that are very well run... where the managers of these companies are actually bearish on the U.S. economy as well. They understand the risks that are going on, and they've constructed their investment portfolios to be bulletproof. In fact, one of these companies has even prepared their portfolio to profit if the market should fall. They actually made a $2 billion profit in 2008 by doing just that... they sold short subprime mortgage bonds. These guys are really smart and they're totally aware of the troubles facing the country. We're putting our money in the hands of investment managers who have a similar worldview as we do. And these insurance companies are very profitable companies even in recessions. You're always going to need insurance. Fires happen... accidents happen, regardless of what's happening in the economy. Insurance isn't your typical cyclical industry. Crux: Do you use stop losses even on these super-safe stocks? Dyson: We have stop losses on every single position in my portfolio... that never changes. But the stop losses on my preferred shares and insurance companies are wider than normal. In those cases, I don't expect to ever have to use our stop losses. They're just there in case something catastrophic happens that hasn't figured into my analysis. Otherwise, I don't expect to them to be triggered. Crux: Sounds good, Tom. Any parting thoughts? Dyson: The other day someone said to me, “Tom, I just want to earn 5% and then I'll be happy. All I need is 5%.” And he said it to me as if 5% really wasn't a big deal... that anyone can make 5% today. I told him, “You don't understand. This isn't the 70s... this isn't the 80s... this isn't even the 90s. Right now, 5% is an extremely high interest rate.” Ben Bernanke and the Federal Reserve have interest rates at zero. Asking for a 5% interest rate is literally asking for a return that's five percentage points over the base rate. That is a very high interest rate. Now you can still find those returns, but you're going to have to take on some risk to get it. These aren't normal times... and a 5% interest rate is not a normal risk-free rate like it used to be. Investors need to move their expectations way down for the next few years. I often joke that if you need to earn income from your investments today, then the first thing you should do is write a letter to your Senator or Congressman and tell them to stop letting the Fed mess with interest rates... to let the market set interest rates. Second, you're going to have to take some degree of risk in the stock market if you expect to earn a decent yield. I think we've mitigated those risks in The 12% Letter by finding some truly extraordinary opportunities... but I had to work really, really hard to find those. I've literally scoured the stock market for the last two years to find the best possible ways for my readers to safely earn more than 5%. It's been quite difficult... and you're not really going to find these opportunities anywhere else that I know of. Crux: Thanks for talking with us, Tom. Dyson: My pleasure. Take care.