In past missives we have suggested that the equity markets have been in a bottoming process since the October 10th capitulation “low.” We have given numerous metrics for that view, but in this week’s Barron’s the always insightful Stephanie Pomboy makes our prose pale in comparison when she states:

“In the very near-term, there are a variety of reasons to anticipate a rally in risk. First is the massive destruction witnessed to date. Our dogmatic [insistence] that markets needed to give back all the gains built on the housing-bubble lie have largely come to pass. Virtually every market is at or near pre-bubble lows, from stocks to bonds to commodities . . . [so] the financial deleveraging may largely be complete (see the nearby crude oil chart). Most notably, yields on corporate credits have climbed to multidecade (and in the case of junk, record) extremes. At the same time, cash [must be] burning a hole in investors’ pockets with 0% yields before inflation and dollar debasement.”

Obviously we agree with our friend Stephanie, which is why we have been recommending the scale buying of distressed debt situations like BlackRock MuniHoldings Insured (MUE/$9.36) and Nuveen Insured Dividend Advantage (NVG/$10.75), both of which sell at discounts to their net asset value and have over 6% tax free yields. We also have been recommending Lord Abbett Bond Debenture Fund (LBNDX/$5.70) with a near 9% yield. Moreover, even though we have avoided the financial complex for years, for those wanting exposure to said complex our vehicle of choice remains the iShares S&P U.S. Preferred Shares (PFF/$28.12), which is yielding over 10% and has a 78% exposure to the financial complex’s preferred shares (see the attendant chart). Additionally, during the past few weeks we have added the iShares MSCI Japan (EWJ/$9.17) and iShares FTSE China (FXI/$28.06) to the ETF portfolio.

Originally posted on pfhacks.com: Jeffrey Saut Sees Markets Bottoming

What is a credit default swap? A credit default swap is a type of credit derivative, meaning its value is derived from the credit risk of a loan, bond, or other type of financial asset. A credit risk is the risk a lender takes that a debtor may not pay back a loan. In its simplest form a credit default swap allows a lender to pay another party for “insurance” against the default of a borrower. A buyer of a credit default swap receives protection against the default of a borrower, and a seller of the credit default swap guarantees that the lender will receive payment. Engaging in this transaction, effectively shifts the risk of default to the seller to the credit default swap, hence the name.

The market for credit default swaps is enormous, totaling $62.2 *trillion* at the end of last year, and has a huge effect on the world’s financial markets. ¹ Take a little time and educate yourself on this subject. For further reading, I recommend you checkout the wikipedia article on credit default swaps.

1. Derivatives and Dangerous Times

Originally posted on pfhacks.com: What is a Credit Default Swap (CDS)?

I would like to propose that you should also apply similar thinking to your income. You should “Earn smarter, not harder”.

I recently read a post on My Money Blog, titled: Save More vs. Earn More: A Dollar Saved Is Two Dollars Earned. In it, the author points out that due to regular income taxes, a person in the 25% tax bracket can expect to keep around $0.58 for every dollar earned. This means that for every dollar this person spends, they would need to earn two dollars. The message here is saving is a good thing, and I agree.

That being said, earning more money is also good thing. Unless the tax rate is 100%, the more income you take in, the more money you have to save and invest.

To earn smarter you should, over time, focus on earning an increasing percentage of your income from sources that offer the lowest tax rates. Here are some ways to earn smarter:

Roth IRA – Contributions to a Roth IRA are made with after tax dollars, and the earnings grow tax free. After tax dollar value of income earned in a Roth IRA:

$1 Earned = $1 Retained

Dividend Income: The current qualified dividend tax rate (set to expire in 2011), on all but the lowest tax brackets, is 15%. After tax dollar value of dividend income:

$1 Earned = $0.85 Retained

Long Term Capital Gains - A capital gain, is the profit you make, when you sell an asset, such as real estate, or a stock, for more than its purchase price. If you held this asset for longer than one year, the gain is taxed at the long term capital gain rate. That rate is currently 15% (which is also set to expire in 2011). After tax dollar value of long term capital gain income:

$1 Earned = $0.85 Retained

As you can see, earning income from these three methods is more preferable than earnings provided by regular income.

As with all things tax related, exceptions always apply. Please speak with your tax advisor before embarking on any investment plan.

Originally posted on pfhacks.com: Earn Smarter, Not Harder