Generating Income in Today's Market

Today I'd like everyone to welcome Tom Dyson Editor of the "The 12% Letter", a monthly investment advisory with one clear objective: To help subscribers collect a steady, reliable "paycheck" (in the form of dividend payouts and fund distributions) and earn a safe 12% return every year.

In today's economy, Tom has found a way to look inside the market and reasons behind moves to pick out some pretty good trades.  I've asked him to open up and give us some of those insights, as well as his favorites for the coming year! Please enjoy the article, comment below with questions or comments, and check out The 12% Letter.


Recently, my colleague Steve Sjuggerud published compelling research suggesting the worst is past and there's another bubble coming. The Federal Reserve is the reason. We've never before seen recessions when the Federal Reserve is in "accommodating" mode and interest rates are at zero.

"The recession is most certainly over," he wrote. "In fact, the more likely scenario is a boom."

I hate to take the opposite side of a trade from Steve. He has an uncanny ability to always be right. But I'm not convinced the recession is over. My reason is simple: The Fed's usual policies are not working any more.

I found this last week...

"Lending falls at epic pace," screamed the front-page headline of the February 24 issue of the Wall Street Journal.

It seems America's banking system is so troubled by losses on commercial and residential real estate loans, it's refusing to lend more money. And the economy is so grim, no one wants to borrow money anyway. So the number of loans outstanding in the banking system is declining.

In 2009, U.S. banks registered their largest full-year decline in loans outstanding in 67 years, according to the Journal. The worst carnage happened in the final quarter of 2009. In the final quarter, banks wrote down $53 billion in loans, the highest write-off rate since the FDIC began collecting data 26 years ago.

When credit contracts and the market forces bankers to write down loans, you get hundreds of bank failures.

Three banks failed in 2007. Twenty-five banks failed in 2008. One hundred and forty banks failed in 2009. Fifteen have failed already this year, and the FDIC says hundreds more will fail soon.

The FDIC is the government branch charged with insuring banking deposits and seizing failed banks. It maintains a secret list of problem banks. To prevent panic, it won't name the banks on the list, but it does publish the size of the list. Right now, there are 702 banks on it... a 16-year high.

(Few people know this, but the reason most of these banks haven't failed already is the FDIC lacks the staff and the money to seize them right now.)

In short, I believe America reached the limits of indebtedness in 2007... and no matter what the Fed does, it can't stop the forces of thrift. America is saving more, spending less, and borrowing less. While these conditions persist, there's no way the recession disappears.

In other words, we're in a once-in-a-century debt deflation and the Fed's interest rate policy can't stop it.

As Richard Russell, one of my favorite newsletter writers puts it, "There's a hard rain a' coming."

In light of this situation, cash should form the bulk of your investments. Don't worry about interest. You'll be so busy snapping up ridiculous bargains at the bottom of the shakeout, you won't care about a couple of years without interest. Cash should be invested in T-bills or T-bill mutual funds. You shouldn't trust your bank to remain solvent or the FDIC to insure your deposits. Keep a little under your mattress and a little in the bank for your day-to-day needs.

As for stocks, buy businesses that are loaded with cash and generate massive amounts of additional cash each year. To do this, they must have recession-resistant business models and minimal debt. These businesses will pay you dividends while everyone else is starving for cash. These dividends will feel extremely valuable.

I like Wal-Mart and McDonald's. They check all my boxes... and their stock prices both rose during the Great Bear Market of 2008.

The beauty of this approach is, if I'm wrong and Steve is right about the recession being over and another boom coming, these two stocks will still keep generating cash and paying larger dividends each year. Heads you win, tails you win, too.

Good investing,

Tom Dyson
Editor, The 12% Letter

P.S. I've designed my 12% Letter portfolio to generate 8% income during a credit contraction and recession. These are the only stocks in the world that will generate safe income in hard times. For more information on "The 12% Letter", click here.

20 thoughts on “Generating Income in Today's Market

  1. Thank Tom for your advise.People don't believe when the forecast talk about a sunamy untill the ocean water is inside of the beach.There is not nothing new about the recession and the bank system procedures.

  2. I am trading since last 1 year in Forex, but without any strategy plan system and knowledge of trading. Before few days ago I read yourblogs and found fantastic knowledge for swing day trading strategy. Thank you very much for this knowledge given to me.

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    My “No Stop Loss” Strategy
    With B.B., R & S lines, Stochastic, RSI, Porabolic trend, SMA indicators.

    *Before entry order, monitor H1, H4, & Day time frame chart and come back to your H1 trading chart.

    For ‘SHORT’ entry order:-
    1) Place your 1 lot size SHORT order at BB Top/ R1 /Stochastic 80/ RSI 70.
    2) Place your second 1 lot size SHORT order at BB Breaks up/ R2 /Stochastic 90/ RSI 80.
    3) Place your third 1 lot size SHORT order at BB Breaks up/ R3 /Stochastic 95-100/ RSI 90-95.

    For ‘Long’ Buy entry order:-
    4) Place your 1 lot size BUY order at BB Bottom/ S1 /Stochastic 20/ RSI 30.
    5) Place your second 1 lot size BUY order at BB Breaks down/ S2 /Stochastic 10/ RSI 20.
    6) Place your third 1 lot size BUY order at BB Breaks down/ S3 /Stochastic 05-00/ RSI 10-05.

    *If R1/R2 or S1/S2 line breaks then don’t closed your positions. Wait for some time , R2/R3 or S2/S3 lines comes after 30/50 PIP distance in each respectfully and likely must to come back near R1/S1 or Pivot line, at this stage you must close your all 3 positions at a time without fail.

    *On average your earning per day is 50/100 PIP in each of EURUSD, GBPUSD, EURJPY pairs i.e. total 100 to 300 PIP for all 3 pair daily. Same for Gold is also give us 300 to 500 PIP daily.

    *No stop loss to be place. If you need SL, place your SL +100 PIP on above R1 or bellow S1 line.

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    -R.B.Patel, Gujarat, India.

  3. If not a credit expansion boom - how about government expansion boom? I see a fight between inflation and deflation, with deflation winning out started late this year. But is it still possible to get a stock market rally, with commodities dropping/deflating and the USD rising? I see an attempt of a fed balancing act .. print more money to keep inflation in the game and keep deflation in check. This way everyone suffers a bit as USD purchasing power lessens and commodities stay flat rather than deflate.

  4. This article is fear mongering. Advising people to put cash under their mattresses is irresponsible and damaging to recovery by scaring folks out of spending and investing.

    The economy is surely coming out of the abyss. The biggest proof is the freight rate indicator. In 2009, freight for 20 foot container had plunged to less than $500. Now it is between $1,500 to $2,000 and rising. This means that international trade has picked up tremendously which is a harbinger for a robust international recovery.

  5. Try this one on. I know of one person with a very good track record who is looking for 19,100 on the DJIA. In April of 2003 he gave us 14,400. Go back and look at that 2007 top. The longer you spend time in this business, the sooner you learn not to dismiss anyone's ideas.
    That being said, I'll take 8 to 12 percent any time I can get it, but the program that is described sounds like a 100% dividend. That is just a little too good to be true. As they say, when something sounds too good to be true, it usually is.

  6. Personally, I like the Trade Triangles with ETFs and sector rotation during uptrends.
    and SH, PSQ, RWM or EUM during downtrends.
    If the dollar tanks, there's always GLD, USO & UDN.
    But I'm either long, neutral or short using the Monthly & Weekly Triangles
    with a +/-75 score to enter the long or shorts.
    Takes all the worry out of investing for me.

  7. There is another very important reason why the banks aren't lending, and it's just simple economics.

    The FED funds rate is sitting at what? 0.25% while the 10 year note is paying just under 3.75%

    When you can borrow money from the FED at 1/4 of 1 per cent and invest it in a vehicle that guarantees a 3.75% return, why on Earth would you loan it to someone you don't know who may or may not pay it back? Especially in this economy.

    The banks have been beaten up enough and they, like everyone else are playing it safe. There is no amount of "stimulation" that is going to get them to take on unnecessary risk when they can make a guaranteed 3.5% return by doing literally nothing at all. Would you?

  8. In my last newsletter from SS he suggested getting out of the stock market.

    The Foundation for the study of cycles agrees with TD -- the market and the USD will show some positive results (?) 1st half and tank the second half, continuing down through 2012. What else cuold possibly result from the mind numbingly destructive policies of this administration? Interestingly enough, the dumbing down of America, election of our first Marxist president and shifting of world dominance back from from West to East is contemplated in the working out of the cycles. The only way to end the recession is for the gov to let the people keep most or all of the $50 bilion in payroll tax it sucks up every week (it will go directly into the exchange of goods and services -- the essential ingredient of successful economies), eliminate cap gains to attract all dormant cash and global investors here, and use the tbill proceeds to pay necessary expenses. Is that likely to happen?

  9. Thank Tom for your advise.People don't believe when the forecast talk about a sunamy untill the ocean water is inside of the beach.There is not nothing new about the recession and the bank system procedures. The money is there in the banks but they don't believe that the recession is finished...why we has to?

    1. Victor::"The money is there in the banks but they don't believe that the recession is finished"

      The money is ONLY in the banks because they are at MARK-TO-FANTASY instead of Mark-to-Market prices.

      All banks are technically insolvent.

  10. Sorry to have to disagree with JohnZ but you have to ask the question if we are going to enter another Bull Market what is going to fuel it? The last one was fueled by credit expansion, credit was the oxygen that kept the furnace going. If credit is contracting which I believe is more than evident and banks are not lending, rather they are hording cash then where in the world is this boom going to come from? China buying our exports? Sorry China is putting on the brakes as its economy is overheating, their 'stimulus' was 4x the size of ours. They are building over there to beat the band and blowing their own bubble in real estate and infrastructure, its starting to look like Japan in the 1980's and we all know what happened there. I recently had a friend return from China who told me that the largest mall in the world is vitually empty except for tourists. If China slows down many of the companies who reported better than expected revenues last quarter due to overseas sales ...hey what happens to them? What about Europe? We saw how Dubai and problems with little Greece who is just 2% of Europes GDP can spook the markets, what happens if Spain defaults? What then? The Euro plunges to parity with the US do those export sales look then? Our own debt problems notwithstanding any external shock to the system and we will see how strong this so called recovery really is.

  11. This is good but rather restrictive advice. What about Utilities, PG, WAG, and Food companies?

  12. jOHNZ- When I look back, I see a bear market rally. Good luck with that Bull of yours.

  13. I find it hard to think 8-12% could be considered stupid, in any market scenario. Although, I would also find it hard to bet against Mr. Steve Sjuggerud! Have made good money from this mans advice over the years. (LOL The best was GDP at a little over $3, several years ago!Was my first successful trade)

    Many Many Thanks to Adam for this Service and sharing his wisdom with us all!! Have learned very much about the Mkts, in a short period of time! Makes me wonder how much I have wasted over the years, while thinking I knew what was going on!!
    Not a sub. yet but, will be soon!!
    Thank You again


  14. This is stupid advice. This is a huge bull market and you are missing everything if you listen to this guy. Look back the last year... what did you miss because of this fear mongering. A balanced portfolio appropriate for your age is the best way to go.

    1. JohnZ,

      You are a fool. To even suggest this is a huge bull market shows what little understanding you have of the market. Look at the volume, the volatility, ect.

      Get a clue before posting so you don't sound like such an amateur.

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