Over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you’d beat the market by an average of 46% per year.

When I was young, stupid and chasing girls, good looks were the most important attribute a female could have as far as I was concerned.

A disastrous relationship with an insane model changed my thinking pretty quickly. After splitting up with “Crazy Christine,” as my friends used to call her, I became much more interested in what was beneath the surface.

The same can be said about my approach to stocks.

Most investors look at earnings when evaluating a company. And that’s a great place to start. Typically, a company that’s consistently increasing its earnings has a healthy business, and the stock should emulate that success.

But I like to dig deeper and really get to know the company. To do that, I look at cash flow.

Cash flow is how much actual cash came into the company versus how much went out. At the end of the year (or quarter) if more cash came in than went out, the company is cash flow positive.

Now, you may be asking, if the company is profitable, shouldn’t it be cash flow positive?

Not always.

Due to complex accounting rules, earnings can be doctored to tell pretty much any story an executive wants.

Here’s an example of how a company can be profitable, but not cash flow positive.

In 2011, InterDigital (Nasdaq: IDCC) made $89 million in earnings. However, its cash flow from operations was negative $34 million. How is it possible the company was profitable, yet saw more money go out the door than came in?

When we look at InterDigital’s statement of cash flows, we see that the company recognized $235 million in deferred revenue, which is subtracted from cash flow. Here’s why…

Deferred revenue is when a company gets money up front, but doesn’t recognize the revenue right away. This is very common among software, technology and services companies. For example, a company will sell a software package that has a $1-million service agreement that’s valid for four years. The company might get paid that $1 million up front, but will only recognize $250,000 per year for four years.

On the cash flow statement, however, that money has to be accounted for, because cash flow represents how much money flowed into or out of the company.

So in InterDigital’s case, the negative $235 million means the company recognized the revenue in calculating net income; however, it doesn’t represent any actual cash that flowed into the company in 2011. That money came into InterDigital in previous years, but is only now being recognized as revenue and contributing to earnings.

To sum up, InterDigital made a profit in 2011 because it recognized revenue on cash that it received prior to 2011. But it didn’t bring in more cash than it spent. Keep in mind, this is actually a conservative strategy, because if the company recognized all of the revenue at once, when it still owes a client four years of service, that could cause problems down the road if its obligations aren’t met.

And it goes both ways…

This earnings and cash flow discrepancy can work the other way, too, where a company is unprofitable. but takes in more cash than it spent.

For example, in 2011 Zynga (Nasdaq: ZNGA) lost $404 million. But when we look at its statement of cash flow, we see that $600 million in expenses was stock-based compensation expense – which is a non-cash item. It still needs to be accounted for on to determine profitability, but it doesn’t represent cash going out the door in the same way paying employees’ salaries does. So that $600 million gets added back to cash flow. After a few other small adjustments, the company’s cash flow from operations was $389 million.

So even though it lost $404 million according to the income statement, the business actually generated $389 million in cash.

I ran a screen to see which companies were unprofitable and cash flow positive and profitable but cash flow negative. Here are some of the largest in terms of market cap. Results are for the full year 2011.

Knowing which companies are getting too much credit for their earnings, or too little for their cash flow, is a good starting point for your investment research.

In fact, over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you’d beat the market by an average of 46% per year.

So whether you’re checking out potential dates on Match.com or looking at the fundamentals of a stock, it pays to look beyond what you see on the surface and dig a little deeper. The rewards for doing so are significant.

Fortunately, I realized that a long time ago. I’ve been happily married to my wife, who was previously not my “type,” for 16 years.

Good Investing,

Marc Lichtenfeld

Facebook is a cloud computing company. Profit from the Facebook IPO by buying the companies that provide Facebook's cloud computing infrastructure.

Over the last couple of weeks, investors have been hearing a lot about the Facebook IPO and the accompanying high-profile road show.

For those who are confused, the road show is a planned set of meetings where the management team of the company going public, accompanied by its investment bankers, shares the investment merits of its about-to-be traded stock and why you, the investor, should buy in on the IPO.

It is not about whether the CEO of said company is wearing a suit, or a “hoodie,” or will even show up at all.

What’s challenging about the Facebook IPO isn’t whether this is a leading company in the new field of social media – oh, it certainly is. And it isn’t, in our opinion, about whether Facebook will continue to get “eyeballs” to its site – oh, it will.

What’s more meaningful to us is simply: Can an entire industry or company that has been in existence for less than 10 years continue to grow at its current torrid pace? Will social media continue to stay “hot hot hot” or will it merge into the mainstream? If it takes a company seven years to “rule the world,” how long could it take a competitor to come in and simply be cooler or just plain better?

And the more important question to us is: Should I even be asking those questions?

“Arms Suppliers”

This brings me back to a recent essay I wrote about cloud computing…

Facebook’s stock may go up or it may go down. But how do I profit from that when the largest institutional investors in the country get to see whether Mark Zuckerberg is wearing a “hoodie” or a suit? What advantage can I gain over them?

The honest answer for me is, “I don’t have any advantage,” and, sorry to say, neither do you.

So, let’s take a step back and look at Facebook another way. In its barest form, what is it? It’s a company offering a service by utilizing the internet. In the cloud computing essay, we defined cloud computing as “simply any technology service, such as an application, infrastructure, or platform that’s offered to customers over the internet.”

Sounds like Facebook to me!

And in that same note, I suggested investors look to the stocks of the “arms suppliers” to the big guys already at war. Make no mistake about it – Facebook’s war is no longer with the Winklevoss twins – it’s now with Google (Nasdaq: GOOG), LinkedIn (NYSE: LNKD), Apple (Nasdaq: AAPL) and even Microsoft (Nasdaq: MSFT), despite any appearances of cooperation. All these companies seek world domination in their sectors.

In the movie Social Network, the Zuckerberg character, irate because someone had threatened the website’s availability, states, “Facebook does not go down, Facebook never goes down,” or words to that effect.

So who are the arms suppliers to a company whose website “can’t go down?” There are a number of different areas in addition to those mentioned in our earlier note.

Infrastructure Management

Admittedly, this term sounds about as sexy as a burlap sack covering a Sumo wrestler. But it is important, and these are the companies that help a company like Facebook stay “up” and performing to expectations.

What are some of the weapons required?

• Suite-based infrastructure management – Companies like CA Technologies (Nasdaq: CA), BMC Software (Nasdaq: BMC), Hewlett-Packard (NYSE: HPQ) and even IBM (NYSE: IBM) sell entire suites of products aimed at keeping data centers up and running.

• Website performance management – If Facebook users in Boston are having problems with the site, but users in San Francisco are fine, what early detection mechanisms are available? Companies like Keynote Systems (Nasdaq: KEYN) and Compuware (Nasdaq: CPWR) have utilities that can monitor this constantly and give the site operator early notification if there is a particular problem in a particular location.

• Application performance – There’s a group of companies that focus on monitoring and managing the performance of applications. Facebook likely has hundreds, if not thousands, of individual applications, and they need to be monitored. Companies like OPNET Technologies (Nasdaq: OPNT), as well as Compuware and Keynote, help with this.

• Network performance – What if there’s something wrong in the network? Companies like NetScout Systems (Nasdaq: NTCT), OPNET, Hewlett-Packard, Cisco (Nasdaq: CSCO) and the other suite vendors can give visibility into what’s going on in the network.

Don’t try to keep up with what the big guys know about Facebook. Figure out what’s going on behind the scenes that makes Facebook work.

You’ll find the grounds far less crowded, and you may make a pretty penny along the way. And you won’t have to figure out if the “hoodie” is going to be the next big fashion trend, either.

Good Investing,

Gary Spivak

Gas drillers and other companies are looking with intense interest at CNG-based transport and storage technology.

Pity the poor North Slope of Alaska…

The region produces 600,000 barrels of oil a day, accruing millions of dollars for the state’s treasury as the crude is pumped through the Trans-Alaska Pipeline System. But its 35 trillion cubic feet in natural gas reserves are essentially a wasted resource.

For years, Alaskan authorities hoped a 1,700-mile natural gas pipeline, costing up to $40 billion by some estimates, might be the answer for tapping U.S. energy demand. Alas, gas in the Lower 48 is too cheap, and the pipeline too expensive. The overland-to-Alberta project was scrapped earlier this month. For now, the North Slope’s gas reserves remain in the ground, without a viable way to get to market.

It’s not just Alaska’s problem…

Stranded Gas

A 2007 EIA study concluded that, out of an estimated 6.1 trillion cubic feet of global natural gas reserves, roughly one-half is considered “stranded.” Remote and lightly populated regions like eastern Canada, northern Australia, Vietnam, Indonesia and parts of Russia’s Siberia are all mentioned as having massive reserves of stranded gas.

And then there’s the problem of “associated gas.” That’s the name drillers give for the stuff that comes up the pipe in oil drilling operations. In 2010, one French oil company estimated that 30% of its greenhouse gas emissions – about 15 million metric tons of “carbon equivalent” – were the result of flaring off associated gas at its drill sites. There just isn’t an economical and safe way to do anything else but burn it as a waste by-product.

But new transport and storage technologies for CNG might just offer new answers to these old problems…

Enter the Coselle

Coselle ™ stands loosely for “coiled pipe in a carousel.” It’s being commercialized by Alberta-based Sea NG. What exactly is the system? Imagine a giant hexagonal-shaped garden hose reel, around 50 feet wide and 10 feet tall. Let’s fill that “reel” with 13 miles of tightly wrapped six-inch diameter steel pipe, capable of holding four million cubic feet of compressed natural gas. That’s “a Coselle.”

Still with me? If you stack a bunch of these “Coselles” inside the hull of a specially-built “Coselle Ship,” you have a vessel capable of carrying up to 500 MMcf of CNG.

That’s smaller than what an LNG ship carries. But here’s the trade-off: LNG requires a large technical infrastructure, mainly because of the liquefaction facilities necessary to convert the gas to liquid form. Liquefaction plants are the biggest cost component of any LNG project, with a price tag of up to $4 billion. For those reasons, LNG ships are used mainly for high volume, high-demand shipping routes. CNG ships of the kind envisioned for these new transport technologies are positioned for shorter, lower volume transits of up to 1,200 miles.

So are Coselle-equipped ships the “missing link” to the problem of stranded natural gas? Perhaps. Sea NG is a private firm, but it has two publicly-held heavyweights in pipeline and ocean transport: Enbridge (NYSE: ENB) and Teekay Corp. (NYSE: TK) as investors.

It’s also why gas drillers and other companies are looking with intense interest at this CNG-based transport and storage technology:

• PLN (Indonesia’s state-run power company) signed a deal in January to transport natural gas, via CNG ships, to a peaking plant on the island of Lombok. The first shipments are scheduled tentatively for 2013.
• Centrica Energy (UK) is weighing the use of CNG ships for transport from its gas fields in offshore Tobago. Neighboring Trinidad has an LNG facility, but concerns about its capacity, and the shipping distance for processing, has Centrica looking at CNG instead.
• Husky Energy (Canada) sees CNG as “the leading technology at present” to get natural gas from its fields off Newfoundland, where the company believes it has reserves of 2.3 trillion cubic feet.

Nor is Sea NG the only company out there pushing a CNG solution to the problem of stranded gas. A rival firm, Houston-based EnerSea Transport LLC, has a patented system called VOTRANS ™ which claims to transport larger volumes and lower operating pressures by optimizing the pressure and temperature conditions of the stored gas. EnerSea is backed by a Mitsui & Company Ltd., K Line Shipping (a Japanese shipping giant), Citigroup and Singapore-based Tanker Pacific.

Keep in mind, CNG ships as a concept have been around for years, but always with what’s called a “bottle” design. If you think of a series of immensely tall steel tanks – giant versions of the propane tank in your barbeque grill – that can fit in the hull of a ship, you get the idea. The drawback of a “bottle ship” is the cost and complexity of all the valves and piping, so each tank can be filled and drained, independent of all the others.

These new-generation gas technologies, on the other hand, are designed to make a CNG vessel much cheaper to build and operate. The American Bureau of Shipping, which sets the design, construction and operational standards for marine vessels and offshore platforms, has already approved designs for ships fitted for Coselle and VOTRANS technology. The main question now is when the first of these new ships is commissioned and built to tap into the world’s reserves of stranded gas.

Good Investing,

Jeff Yastine

Keiner said the big buy now is in the gold mining stocks. There are small miners trading at PEs of 2. That’s cheap!

In focus this week: gold at $6,000 by 2015 and $2,100 by the end of this year, natural gas and oil producers, home builders are for real and the SITFA.

Jurg Keiner of Swiss Asia Capital Singapore said this week in a CNBC interview that gold could hit $2,100 this year and $6,000 by 2015, all due to money printing and more crises in banking and debt issues.

Keiner sighted the weakening of the western democracies and the inevitable money printing to try to spur growth that has to occur as the major reasons we will see a further run in gold.

The money printing will lead to weaker currencies, especially the dollar, which will further erode buying power, which is just another way of saying inflation.

Keiner described the dollar as being very weak and can only weaken further, which he says will add significantly to the gold trade. He sees no upside for the dollar and sighted the fact that the dollar has been unable to rally against the euro despite the horrible news that has been coming out of the EU for over a year.

The weak dollar combined with accelerated money printing is what Keiner believes will drive gold this year and for the next three.

Keiner said the big buy now is in the gold mining stocks. There are small miners trading at PEs of 2. That’s cheap!

Gold has and will continue to trade against the dollar and with inflation. Both look to be very good bets for the next few years. The recent sell-off is an opportunity.

Natural Gas and Energy

If you’re a regular viewer of this segment, the recent run-up in natural gas prices shouldn’t be a surprise. I’ve been talking about it here for the last few months.

Analysts I’ve been reading see $3 nat gas by the end of the summer and $6 by the end of the year.

Pushing prices now is the hope for a normal cooling season after a very warm winter, increased demand by LNG exporters, decreasing amounts of gas being injected into storage and increasing demand from electric utilities.

PIMCO, one of the best names in the industry, sees all gas and oil as the biggest plays in the market with huge upside.

They like pipelines, specifically Plains Pipeline, and other names we have heard before: Anadarko, EOG, Pioneer and Continental.

PIMCO is focusing on low cost-producing companies in the shale gas areas and describes what’s happening now in energy as revolutionary and is reshaping the whole U.S. economy.

According to Mark Keisel, manager of PIMCO’s five star-rated corporate bond fund, the United States could be energy independent in as little as 10 years.

The United States is currently the lowest-cost energy producer in the world. EOG, for example, can produce a barrel of oil for as little as $32 and sell it in the 90s and low 100s.

That’s how big the opportunities are in the current energy market. You have to be a part of this.

Natural gas and oil producers!

Home Builders

Here’s another industry I’ve been banging the table about for two years and it’s finally showing movement.

Recent numbers are pointing to a firm turn around in new home sales.

The S&P’s home builders’ index is up 43% this year and up a whopping 125% since the low last October. Home builders’ shares are 23% higher than last year and in the first quarter there were 337,000 homes sold compared to 299,000 last year. But the 337,000 number is below the same period for 2010, so there may still be reason for hesitation.

The Journal reported that the three large home builders, Beazer (NYSE: BZH), MDC Holdings (NYSE: MDC) and Standard Pacific (NYSE: SPF), reported selling 2,115 homes in the first quarter up from 1,556 last year and up form 1,912 in 2010. Net new orders were up, as well.

Share prices are up a lot, so look for some weakness before you jump in with both feet, but barring any serious dumping in the economic numbers, this industry should finally see a slow but solid climb out of the abyss.

And the SITFA

France gets the cheek smacker this week, again. They did in fact elect a socialist who says he will dump the plan to save the EU that Sarkozy struck with the Germans.

I’ve just returned from two weeks in France and had a front row seat for their presidential elections last Sunday. It was something to watch.

Based on the people I spoke to and what I saw at the Bastille, which was the gathering place for Hollande’s supporters, that’s the socialist who won, I wouldn’t bet on any real improvement in the EU situation, at least not from France’s end.

But the Journal’s Joseph Joffe thinks otherwise.

He said watch the new French president in the coming weeks. He’s betting he will take a page out of “Casablanca” and sputter: “I am shocked, shocked to find out about the mess Mr. Sarkozy has left.” Then he will blame Mrs. Merkel’s brutishness for forcing him to deliver a “blood, toil, tears and sweat” speech in which he breaks all his campaign promises.

Sounds like the “Blame Bush” strategy our own president has been using, hmm?

And Joffe’s position is consistent with a conversation I had the night before the election with two bankers from Society Generale.

First off, they were bankers who described themselves as socialists. How do you work in investment banking and claim to be a socialist? I’m stumped!

But here’s the killer. Both of these bankers agreed that Hollande’s ideas are too far left for France’s current situation, but they believed his ministers would force the reality of France’s situation into his decision making.

My question for them and Joffe from the Journal, what if they don’t? What happens if this life long, committed socialist runs amok and forces more spending and government hiring?

Stay tuned. It looks like the next few years are going to be a real hoot.

Is oil speculation truly a financial force for destruction, or has the Obama Administration just found a new scapegoat?

Every great leader I’ve known had one quality in common: a strong propensity to give credit to others when things go right and take personal responsibility when things go wrong.

Yet by that standard, Obama is no leader at all.

Nearly four years into his term, he still blames high unemployment and the state of the economy on his predecessor. He blames his trillion-dollar-plus deficit on the intransigence of his political opponents, even though his own party can’t even propose a budget. He insists that middle class Americans are suffering because “the one percent” – the folks who take risks, create jobs and experience economic success – are somehow denying opportunity to the rest of us. (I’m still waiting to hear how.) But this time he’s really outdone himself, blaming high oil prices on “greedy” traders and investors like us.

In a recent White House speech on April 17, Obama said, “We can’t afford a situation where speculators artificially manipulate the market by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”

“Quick profit.” Man, that sounds ugly.

Of course, if you believe the federal government is hiding an alien space ship in Area 51, you may have stood and cheered his words. The rest of us were less impressed, including Terry Duffy, the Executive Chairman of CME Group, the world’s leading derivatives marketplace.

“People need to study their facts before criticizing speculators,” said Mr. Duffy. He points out that futures traders aren’t just exercising their freedom to take financial risk (and shoulder any resulting losses). They also increase liquidity, reduce spreads and, ironically, help the Treasury Department and American taxpayers save money on the cost of sovereign debt by allowing traders to hedge risk on Treasuries.

Of course, whenever oil prices surge, conspiracy theorists raise their heads again. Even though the facts regularly beat them down like so many whack-a-moles.

Four years ago, the Commodities Futures Trading Commission (CTFC) created a special task force to study whether speculation was responsible for the run-up in oil prices. It included experts from the Agriculture, Energy and Treasury Departments, the Federal Reserve, the Federal Trade Commission and the SEC.

Its conclusion? (Try to stifle that yawn.) That oil price increases were due to fundamental supply and demand factors.

I know it sounds humdrum to conspiracy theorists, but oil demand is what economists call “price inelastic.” People need to drive cars, heat homes, fly in airplanes and run factories. These things take oil. (Although an increasing shift to natural gas by utilities is already starting to undercut oil prices.)

The CTFC report found that growth in world oil demand – especially by China and other developing economies – was outstripping new production capacity. As a result, the market tightened and prices rose.

Moreover, the futures market is far less susceptible to bubbles than the stock or bond markets. That’s because, by contrast, the futures market is a “zero-sum game.” One investor’s gain is exactly equal to another investor’s loss.

Under the standard futures contract, one investor agrees to buy a commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the price is up on the settlement date, the buyer wins. If it goes down, the seller reaps the profit. The loser pays the winner; actual commodities are rarely transferred.

Obama – forever in search of a new scapegoat – must surely know this. Then again, as someone who has never started a business, managed a company, taken a significant financial risk, or even held a job in the private sector, maybe he doesn’t.

Either way, demonizing speculators solves nothing. If Obama really wanted to help middle-class families by reducing oil prices, he could encourage production, conservation, or alternative fuels like natural gas.

Of course, that would mean telling the truth and taking responsibility. And those aren’t his strong suits.

Good Investing,

Alexander Green

Editor’s Note: Gas is one sector where Alex sees a contrarian opportunity right now. He recently recommended two gas companies in his premium trading service Insider Alert.

He was kind enough to share one of these recommendations with Investment U Plus subscribers in today’s edition. It’s a company with solid fundamentals, recent heavy insider buying and an 8% yield, to boot.

For more information on receiving this pick along with our experts’ recommendations in each daily issue of Investment U, click here.

Disclaimer: The views presented in today’s Investment U are solely those of the writer and do not necessarily represent the publication or publisher. As stringent supporters of an open marketplace of ideas, we encourage you to contribute your thoughts to the discussion in the comments section below.

The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.

Even though the European Union had its problems over the past few years, there were still some things about it that we could depend on…

The countries in the North are the good kids who follow all the EU rules. The PIGS down in the South act like pigs and are punished for living way beyond their means. And Germany and France have a Mommy/Daddy dynamic that keeps everyone in line.

Well, the times are changing. The changes aren’t the decrees of EU administrators, but for the most part, have a grass roots origin. People are voting in elections across the region, voicing their support or anger in response to austerity measures proposed or implemented. There will also be the need to create new coalitions to govern countries were the factions are nowhere near seeing eye to eye.

Over the past few weeks, there were three specific political events that will probably weigh on financial markets for the rest of the year and beyond.

The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.

Politicians and parties opposed to the austerity measures favored by Germany appear to be gaining momentum, advisers say. If new leaders reversed course and opposed the belt-tightening policies that were a condition for bailout funds, equity markets will suffer.

We need to take a look at three situations going on now that could be big headaches later…

The Netherlands: Another One Bites he Dust

Here’s the problem. Almost two weeks ago, Dutch Prime Minister Mark Rutte’s party was unable to reach an agreement on €14 billion in necessary budget cuts. They have to bring the country’s deficit to GDP ratio down to 3% in 2013 from the currently forecasted level of 4.6%.

Rutte submitted his letter of resignation to Queen Beatrix after entering into a governmental coalition with the extreme right-wing Freedom Party, led by Geert Wilders, which had refused to support the budget reduction.

And when you hear the rhetoric, don’t expect anyone from the Freedom Party to be won over anytime soon. According to Wilders, “The demands from Brussels are ridiculous. If we were to follow them then unemployment would only grow, and it is against the interests of my voters. We don’t want to see our pensioners sweating blood for the sake of a dictator in Brussels. We will not let our elderly people pay for the Greek swindlers,”

That doesn’t sound like “we’re close.”

Up to this point, one of the few remaining success stories in Europe has been the Netherlands.

This may come back to bite some of us because the uncertainty jeopardizes the Netherlands AAA rating. If the Dutch lose their rating, only German, Finish and Luxembourg debt would be top-rated.

So realistically, Germany would be left as the only true credible backer of the EU.

And due to its rating, many private money managers own Dutch debt as a hedge against the PIGS. A AAA rating allowed it to leverage a lot more. If Dutch sovereign debt tanks, you’ll see a lot more deleveraging of borrowed assets by hedge funds, banks and others.

France: Finance, Be Afraid, Be Very Afraid

Say “adios” to the Sarkozy administration in France. It’s the latest EU government to fall by the wayside – like Spain, Ireland, Italy, the UK, Portugal, Greece and the aforementioned the Netherlands – in the past two years.

French President Nicolas Sarkozy conceded defeat to socialist challenger François Hollande last weekend after polls closed in the final round of France’s presidential election.

Why is everyone on edge? Well, let’s briefly go over the platform Hollande ran on:

• He refuses to play Robin to Merkel’s Batman. All those agreements that Sarkozy helped broker to tame the sovereign debt crisis are now possibly back on the table for renegotiation.

• Imagine this, the socialist doesn’t like banks. He has openly attacked the City of London and Wall Street for causing the financial crisis. Mr. Hollande said in January, “My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

• He says he will raise the minimum wage, cancel scheduled spending cuts, hire back thousands of government workers and roll back the retirement age from 62 to 60.

• He also wants to increase government spending to sponsor large infrastructure projects – all in a bid to spur economic growth.

• And where is this money coming from? Hollande wants to tax France by means of shock and awe. Anyone making more than a million euros a year will see their tax rate go from 45 to 75 percent. That absolutely blows one’s mind.

• If you declare war on banks, you might as well raise their taxes too by around 15%. In addition, he wants to implement a financial transaction tax, which could hurt high frequency trading, wiping out a major profit center for some hedge funds and banks that operate in France.

And last but not least, during the last Presidential debate, Hollande noted his discontent with the one thing that’s holding the euro together– cheap funding from the European Central Bank. He scornfully said, “Banks get a loan from ECB at 1% and lend at 6%. I refuse.” He just declared war on the only thing keeping the EU together right now. The money the ECB is essentially printing is being lent to banks at this rate so they can buy sovereign debt that no one else wants.

Greece: Plenty of Parties, Not Much Fun

They can’t help themselves. Greeks finally got to voice their opinion about austerity last weekend through popular vote when the people voted for an array of anti-bailout parties on the far left and right.

PASOK and New Democracy, the two parties that have dominated Greek politics for the last 40 years, received a combined one-third of the vote. That’s half of what they got three years ago. The two parties won a combined 150 seats and that’s not enough to form a coalition government on their own.

What should have EU officials very nervous was the strong showing by Syriza, a coalition of radical left and green groups. These groups don’t take too kindly to bailout and austerity measures. Syriza attracted many disaffected PASOK voters and finished in second at 16.6% – its best showing ever.

Since New Democracy got the most votes, it has three days to find partners to form a government. If they can’t, then Syriza and PASOK will have opportunities to power grab. If none of the parties can bring about a workable coalition, Greece will have to hold elections again. That would mean even more instability in a country already tearing at the seams as the economic crisis continues to deepen.

A possible credit rating downgrade, a finance-wary President-elect, and more Greece instability have already begin to make the markets uncomfortable. And there are things which will probably come to pass because of it.

What Will Money Managers Do?

At the moment, some investors are taking some cautious steps to prepare for prolonged uncertainty.

Because the United States is expected to grow at a more stable pace than Europe, investors should buy more U.S. stocks than international stocks, says Ethan Anderson, Chief Investment Strategist with Rehmann Financial.

Paul Christopher, Chief International Advisor of Wells Fargo, is cutting back exposure to commodities like base metals and agriculture, which could see prices drop due to the weakness in the European economy.

In equities, he’s balancing aggressive sectors like industrial and material with defensive sectors like utilities. These are things to keep in mind going into very uncertain times in the global economy.

Good Investing,

Jason Jenkins

One new option to note, iShares invests in an index of dollar bonds based on the J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB).

One question on many investors’ minds right now is how to beat inflation. U.S. Treasuries and certificates of deposit obviously can’t cut it right now…

There’s a simple reason investors are flocking to the dividend market – savers don’t want to lose their purchasing power.

But lately there’s been a new trend for yield chasers overseas and it may be less risky than you think. Returns over inflation look very attractive right now. For the first quarter for 2012, the average emerging bond fund tracked by Morningstar returned 7%, versus 0.3% for the Barclays Capital U.S. Aggregate Bond Index.

But Why Emerging Market Debt?

Some fund companies offer two types of emerging market bond funds: those that invest mainly in bonds issued in U.S. dollars and those that invest mainly in bonds issued in local currencies.

Dollar-denominated foreign bonds have been on the rise and they attract those who are a little hesitant about currency risk.

Because of lower borrowing costs, companies from nations such as Brazil, Russia and Indonesia are diving into the U.S. debt market.

This is a good thing for potential investors in the market. Emerging market firms issued a record $75 billion in dollar-denominated bonds in the first quarter, a 40% spike over the same period last year.

The extra bonds out there have given investors a way to get higher yields than what’s available at home. The “yield chasers” have pumped in $14 billion into emerging markets bond funds in the first quarter, the most since the third quarter of 2010.

Emerging Market Companies Are Maturing

Have corporate bonds in emerging markets become fashionable because of a herd mentality? Or have we here stateside gotten over our developed country bias?

Bonds have been proven to add true diversification to portfolios. Also, bond issuers – countries and companies – in developing markets are maturing. By some measures, their bonds look more attractive than those of the developed world.

In a March research paper, Christopher B. Philips and colleagues in Vanguard’s Investment Strategy Group found that a well-diversified portfolio that includes an allocation to hedged international bonds may could help get rid of overall portfolio volatility.

The study showed that investors could benefit from allocating at least 20 to 40% of their fixed-income holdings to international bonds. Emerging market bonds could be part of that allocation for risk-tolerant investors, Mr. Philips said.

What scared a lot of investors from international bonds are interest rate risk, shady political regimes and policies, and the economies of many different markets. Mr. Philips’ team found that the things driving international bond prices are relatively uncorrelated to those same things in the United States. That’s key as a diversification benefit.

What You Need to Weigh

Things you need to be wary of overseas:

• We may have more bonds out there, but a lot of money managers are buying them up quickly. It may be too quickly. Yields on emerging market corporate bonds have fallen 1.5 percentage points since October, according to J.P. Morgan data.

• This is a new market. There’s a short time frame for evaluating these types of bonds with their U.S. counterparts.

Some things that may allow you to overcome your concerns:

• Developing countries are expected to expand 5.75% through next year. That’s almost four times the growth projected for the developed world, the International Monetary Fund says.

• The payout on the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified, which has an average triple-B credit rating, currently averages 5.6%. That’s 1.1 percentage points above similar rated U.S. corporate bonds.

Among funds tracked by Morningstar, there are no index mutual funds for emerging-market bonds yet. Index ETFs investing in emerging market bonds are available, but as we’ve written many times before, watch out for leveraged bond funds. One new option to note, iShares invests in an index of dollar bonds based on the J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB).

Good Investing,

Jason Jenkins

In order to have a truly diversified portfolio, you must include a healthy dose of foreign investments.

Imagine if throughout your working career you only did what you were supposed to 30% of the time.

Would you have been showered with raises, bonuses and praise? Or do you think you would’ve been left underpaid, unappreciated and unsuccessful?

The likely outcome is the latter. It’s obvious.

Yet many investors don’t realize they’re making a similar mistake when it comes to their financial portfolio.

That is, they’re only doing 30% of the “work” necessary to get the most out of their investments.

How are they doing this?

By simply ignoring companies that operate outside of the United States. Let me show you what I mean…

It’s a Global World… and It’s Not Going Away

According to The World Bank, the U.S. accounts for 30% of the world’s total equity market cap.

Granted, that’s a huge chunk for any one nation.

But it also means 70% of the all the publicly traded opportunities around the world are found outside of America.

And that’s not all…

• The growth rate in emerging markets is about four times faster than that of the United States.
• By 2030, 93% of the world’s middle class will reside in emerging nations.
• According to Ameriprise Financial, emerging market stocks returned more than 13% a year over the past decade, compared with less than 1% for U.S. stocks.

The point is: In order to have a truly diversified portfolio, you must include a healthy dose of foreign investments.

At Investment U, our Asset Allocation Model suggests dedicating 30% of your total portfolio to foreign stocks.

So where can you look for great opportunities to profit?

One place to consider – that isn’t on everyone’s radar yet – is one of Latin America’s fastest-growing global markets.

I’m talking about Colombia…

The Next “It” Emerging Market

Believe it or not, after years of drug violence, The World Bank says Colombia is the most secure country in all of Latin America to do business.

In fact, foreign investment has more than quadrupled there since 2002. It even hit a record all-time high in January. And it looks like this is just going to be the very beginning…

On Thursday, Colombia and China reached an agreement that will bolster its exports of coal and oil to Asia.

If you didn’t know, Colombia is already the third largest exporter of oil to America.

Now that it’s going to start increasing its role in Asia, too, oil companies in Colombia are propped to enjoy a long period of prosperity.

Investors can take advantage of this enormous opportunity by investing in a company like Ecopetrol S.A. (NYSE: EC).

Ecopetrol is Colombia’s largest oil and gas company. With a market cap of $113 billion, it conveniently trades directly on the NYSE. It even has a solid dividend yield of 3.3%.

What’s more, the company is currently experiencing quarterly revenue growth of 25%. It’s operating and profit margins are sitting pretty at 24% and 37% respectively. And its stock price has been on a tear… up 45% so far this year.

But no matter whether you’re into opportunities in South America, Asia, or anywhere else, just remember to expose your portfolio to emerging markets and foreign investments.

You won’t regret it.

Good Investing,

Mike Kapsch

The benefits of preferred shares is that you get a good yield, a more secure position than common stock holders and, in these uncertain times, less risk.

Perhaps the most pressing request I hear from investors these days is for an investment with a decent yield and not much risk.

Unfortunately, it doesn’t exist. High-yield stocks can tank. High-yield bonds carry default risk. Even conservative utility stocks can get socked in the stomach by higher inflation or interest rates.

There are, however, several solutions. You can own individual bonds so your expenses are lower and you’re assured of getting your principal back at maturity (provided, of course, you don’t plunk for the really junky stuff). You can diversify among high-yield stocks, accepting that you’re going to experience higher volatility than a bond portfolio.

But you should also consider something else: Preferred shares with their current 6% to 7% average yields.

Preferred shares are hybrid securities with the properties of both stocks and bonds. They generally carry no voting rights but have a dividend that has priority over the common stock. (Hence the “preferred” label.) And, like common stock dividends, preferred dividends are taxed at the favorable 15% maximum tax rate (although that may end come January 1 if President Obama and his fellow Democrats have their way).

The benefits of preferred shares is that you get a good yield, a more secure position than common stock holders and, in these uncertain times, less risk.

Of course, preferreds still fell in the recent financial crisis. But they dropped only two-thirds as much as the S&P 500. They also rebounded more strongly during the recovery.

For instance, the largest preferred stock ETF, the $8.5-billion S&P U.S. Preferred Stock Index (NYSE: PFF), returned 22% annualized over the three years through April, boosted by its high yield and heavy tilt toward the recovering financial services sector. That is more than two percentage points better than the S&P 500 over the period, and more than five points above the average high-yield bond fund, according to Morningstar.

But understand the downside, too. Like bonds, preferreds are interest-rate sensitive. When rates go up, prices go down. Unlike bonds, however, these securities will either never mature or may not for as many as 50 years. So if interest rates rise, the preferred investor could be stuck with lower-valued paper that a corporate issuer may never redeem.

At the same time, there’s limited upside potential with preferreds because the issuer typically has certain redemption rights. These generally include a “call” provision, where the issuer can buy out shareholders at face value after five years from the issue date.

There is also credit risk. Troubled companies can suspend preferred dividend payments. And while preferred stock is senior to common stock in a corporate bankruptcy, they’re subordinate to bonds in terms of rights to the assets of the company. (Preferred shareholders generally get nothing in a liquidation.)

Still, preferreds offer you higher-than-average yields, less volatility than common stocks and good diversification. In concert with a laddered bond portfolio and a high-quality stock portfolio, they make sense.

Preferreds aren’t a cure-all. Just an income alternative you may never have considered – and one component of a well-diversified portfolio.

Good Investing,

Alexander Green

Editor’s Note: In today’s edition of the Investment U Plus Alex recommends three simple options for investors looking to diversify with preferred shares.

For more information on how to gain access to Investment U Plus and get premium recommendations within each Investment U Daily article, click here.

You should be able to do better than the Philippines ETF (NYSE: EPHE) if you can pick the companies growing revenue and profits the fastest.

Last week, a crack reporter for a leading investment newspaper asked me the following question:

“What’s the economic significance/implication of a country having a young population?”

I had to think quite a bit before responding. You often read about the connection between demography and investing. Gurus like Harry Dent focus almost exclusively on demographic trends to make their market calls.

In brief, here’s my take on how a youthful population can affect the potential for economic growth of a country. More importantly for investors, what companies will likely prosper with this demographic wind at their back?

• Younger people are just at the beginning of their consumer and investor life cycle – great fuel for upward growth of consumer spending in many areas over a long period of time.

• A younger population means lower healthcare and other government retirement benefits – greatly relieving pressure on national budgets.

• Younger people get married and have kids – this means a population growth spurt – a key part of the formula for economic growth and a sign of confidence in the future.

But I caution that having a youthful population is far from an automatic success formula. A country needs to have basic institutions in place, such as rule of law and an independent judiciary, good primary education and an open market economy.

Need proof? Many of the poorest countries in the world have a young population, but are mired in war, political instability and corruption. Mali, for example, has 47% of its population under the age of 14.

Growing Faster

It’s interesting though to see that younger countries do seem to be growing faster. I don’t want to bury you in numbers, but let me give you some data points.

While America has 20% of its population under the age of 14, the Philippines tops the list at 34.6%. For Peru, it’s 28.5%, Columbia 26.7%, India 27.3%, Mexico 28.2% and Vietnam 25.2%. For China, it’s a surprising low of 17.6%, and Russia comes in at only 15.2%.

On the other side of the equation, the percentage of citizens over the age of 65 is highest in Japan at 22.9%, while it’s 13% in America, 6.6% in Mexico, 6% in Indonesia, 5.5% in Vietnam and only 4.3% in the Philippines.

The Philippines looks like a clear winner on both ends of the age game.

But the critical question for investors is to think through what areas will benefit most from these demographic trends. A growing population and families at the beginning of their consumer life cycle means higher demand for things like food, drugs, consumer banking services like mortgages, cellphones, oil and energy, waste management, autos and motorcycles, construction and housing.

The Republic of the Philippines

As an example, let’s take a look at the winner of the demographic derby, the Republic of the Philippines. For some time, the Philippines, a country of 100 million, has been a bit of a laggard in Asia, though lately its prospects are brightening. The country is now a net creditor and its budget deficit has dropped to 2% of its GDP. Infrastructure is improving and the political situation seems to stabilizing, and the Philippines’ banking system is the healthiest in Southeast Asia.

All this good news has sparked Manila’s stock market. It was the world’s seventh-best performer in 2011 and, so far in 2012, the Philippines ETF (NYSE: EPHE) is up 25.9%.

You should be able to do better than this basket of stocks if you can pick the companies growing revenue and profits the fastest. Some may think that stock picking is an afterthought after identifying a promising trend or market, but it’s by far the most important decision.

For the Philippines, here’s the challenge: there’s only one Philippine stock trading on the NYSE – Philippine Long Distance (NYSE: PHI). And while it offers a nice dividend, the stock seems rather expensive to me and growth is slowing.

There are also 12 “pink-sheet blue-chip” Philippine stocks that trade over the counter, but the liquidity for them is very poor.

If you have a brokerage account that allows you to invest in the Philippine market though, here are a few companies I like in particular:

• San Miguel Corp, which is not only the dominant (founded in 1890) brewer in the Philippines and many parts of Asia, but is active in food, beverages, power, mining and banking. Drinking beer (before graduating to fine wine or a martini) seems a perfect fit with youthful population.

• Another good match is SM Investments Corp. Founded in 1960, the company is at the sweet spot of shopping mall development, retail, financial services, real estate development and tourism, hotels and conventions businesses in the Philippines. During the first quarter, revenue was up 16% and net income up 13% year over year. SM Investments is the top holding (8.2%) of EPHE.

For many of you, EPHE is the best fit, but don’t forget your trailing sell stop since there can always be some profit-taking from time to time.

Good Investing,

Carl Delfeld