Thank you, Storm Watchers,

From your emails, looks like I’m helping.  Let’s talk on Tuesdays and Fridays from now on until you feel you’ve got your feet under you again.

Before I get to your questions, here’s some perspective.

CHEMICAL ENGINEER
DISCOVERS ALCHEMY, BLOWS UP WORLD

“Then a light went on in my head.”  That’s Jack Welch, a chemical engineer by training, describing how he had discovered the alchemy of leverage.  He went on to make GE Capital the jewel in GE’s crown, responsible for 50%+ of GE’s profits.

Looks naïve now—disastrously so.  But a whole generation of managers were suckered in.  Their reputations, success, very lives are in tatters now.

Think: Who didn’t drink the Leverage Kool-Aid?  THOSE are the managers I’m investing in.

Mark my words: a new generation of managers is stepping into Welch’s Gucci’s.  Their innovation is in their product development division, not in their accounting offices.  Deflation is their meat, global competition is their drink.

Who are they?  Often, they lead technology companies.  I’m sifting through the books of a handful now—I’ll have my list (it’s a short one) of Leaders of a Post-Welch World for you on Friday.  Watch for it.

Lesson for now: A Welch-style manager won’t help you now, no matter how “cheap” his stock is.

WHAT HAPPENS NEXT

New highs (above 910 on the S&P) before Christmas.  You have just FIVE DAYS to complete your selling.  New Storm Watchers should review our sell program here.

Broadly: Don’t hang on to any “sicko” banks. No mortgage lenders, builders or debt-heavy commodity producers.  Promise me.

Exceptions: OK to keep buying Accenture, IBM, Target, Walgreen.

SNACKERS ALERT

Yes, I know.  Sometimes you get the midnight munchies for investing.  It’s OK if you slimmed down your portfolio, banished high-leverage stuff and feel good about your risk.  ONLY THEN reach for the Cherries Garcia.

Dish yourself a scoop of IQI.  Yep, it is Morgan Stanley Quality Municipal Income trust, a (semi-) leveraged bond fund, throwing off a 9.1% TAX-EXEMPT yield.  Trades at 20% discount to NAV.

Buy below $7.70.  Just a scoop, please.

OBAMA DISCOUNT

There’s the Obama Premium—infrastructure, solar, etc.  Too expensive.  Not interested right now.  Then there’s the Obama Discount: defense.

Lockheed Martin (LMT) is the winner here: record profits in ’09, trades at 9x ’09 earnings, 3% dividend yield.  Pay up to $83, and watch it jump 30% when investors figure out the world is still fragile and Obama carries a big stick.

Tell you about another Obama Discount stock on Friday.

YOU HAVE QUESTIONS

Q: Rebecca: Should I short or long China, Richard?

Sell all emerging markets investments.  As commodity producers or manufacturing centers, these countries are acutely exposed.

As far as China is concerned, I wouldn’t short it today because there’s a brisk rally under way in Shanghai. But it may be worth another look in early January.

Q: James: Any comment on gold funds?

We recently sold our exchange-traded fund GDX for a quick 32% profit in two weeks. I say stand aside for now.

Q: Ginny: I thought Lehman Brothers was bankrupt.  Is it safe to buy their TIPS?

Yes! Don’t let the “Lehman” in the name alarm you; Lehman Brothers has nothing to do with the management of the fund. The name merely refers to an index devised by Lehman to track the universe of Treasury inflation-protected debt.

Exchange-traded iShares Lehman TIPS Bond Fund (TIP) offers a sound hedge against the inflation that will ultimately and inevitably result from Uncle Sam's multitrillion-dollar bailouts. It’s produced an 8% yield over the past year.

A word of caution: Because it trades actively on the New York Stock Exchange, the fund is subject to wide intraday swings in price. For best results, I recommend placing a limit order at the price you want in. (I’ve set a specific buy price for my Profitable Investing readers. Learn how you can join here.)

Q: Donald and Edwin: I’m retired—can’t afford losses, can’t look long-term for gains, either.  What am I supposed to do?

It’s a tough situation, gentleman. And believe me, you are not alone.  I think the best strategy for people in your situation is investing in stocks with generous dividends.  I believe these will produce more wealth, at less risk, over the long run than low-dividend or no-dividend stocks.

For retirees and other income seekers, moreover, dividends still offer a handy wad of cash to pay for living expenses.  Bonds and CDs, with their fixed yields, don’t give you much of an inflation hedge. Dividends do—at least when they’re rising, the normal state of affairs.

That’s why I’ve created an entire portfolio for my Profitable Investing readers called The Incredible Dividend Machine.  These are stocks yielding from 4% to 17%, and I’ve mapped out their payment schedules so you can make sure you’re receiving a dividend check every month!

I just added 7 new buys to the Dividend Machine in the current issue. Click here to join now and receive immediate access.

Keep your questions coming—and keep bailing.  Talk again Friday.

Richard