The mammoth government bailouts of failing home lenders Fannie Mae and Freddie Mac, have sparked widespread relief that the worst-case economic scenario has apparently been avoided. Treasury Secretary Paulson, the primary engineer of the avalanche of government guarantees, has even been hailed as the "Hero of Capitalism." However when the history of the rise and fall of the United States of America is finally written, the "housing bailout bill" will be shown to be a seminal event. If the road to hell is paved with good intentions, we just laid down a mile of asphalt.

Markets have responded the way they always do to news that seems positive. Gold is down and the U.S. Dollar and American stocks have staged minor relief rallies. But as the harsh realities of these "bailouts" become clear, in the form of hundreds of billions of new government debt likely to be monetized, the good feelings will vanish and the panic selling will begin. Soon investors will realize that the government has just thrown gasoline on the wild fire it set in the first place. The economy will be torched and what is left of our free market economy burned to a cinder.

Undoubtedly the bailouts will come with a huge price tag, but the costs will not necessarily be borne only by taxpayers. All workers and savers, whose well-being depends on the value of the dollar, will lose as the dollar is debased. This initial bailout bill is merely the camel's nose under the tent. Capitalism can't work when individuals are not held accountable for their actions. When irresponsible behavior is rewarded and responsible behavior punished, the moral hazards will lead to financial ruin. If Americans know that they can borrow without consequences, and if those who resist such temptation get stuck with the bills, our market economy will fall apart.

Fortunately, at the very time that we need to get rid of any remaining dollars still in our possession, not only is there a bounce in the dollar, but many of my favorite foreign stocks are on sale as well. The world is over-reacting to our problems, almost to the extent that we are under-reacting. Investors are over-estimating the global consequences of the collapse of the American consumer. I have long argued that American consumers have been functioning as global economic parasites, feeding off the productivity of the rest of the world. When the parasite is removed, the host will thrive. While those who have loaned us money will finally recognize their losses, the truth (belatedly recognized) will set them free. Once they move on, the world will enjoy enhanced growth, as it reclaims the savings, resources and consumer goods previously sent to America on credit.

The recent weakness in global stocks should be seen as a blessing not a curse. Low prices are an opportunity to capture more non-dollar assets, and lock up an even greater foreign currency denominated dividend stream. Given the recklessness of the current U.S. economic policy, the greenback will likely lose substantial value in the very near future. Though I can understand why many clients may view the recent declines as casting doubt on my overall strategy, I am convinced as ever that it will ultimately be vindicated. In my book Crash Proof I wrote that the initial decline in U.S. stocks might temporarily bring down foreign markets, but that such drops were not to be feared but embraced. Thus far I have seen nothing to alter that forecast. In the end, the race is won at the finish line, not at the starting block or at some arbitrary point in between.

Often doing the right thing flies in the face of conventional wisdom. Just remember the very 'experts" who are assuring us that the government has saved the day, were those who assured us all was well. The same geniuses who are convinced the subprime problem has been solved are those who devised the loans in the first place. The key is to have the courage to stand by your convictions and not be swayed by the mob. If you have not yet done so, watch these YouTube clips of my presentation back in 2006 at the Western Regional Mortgage Bankers Conference. Click here for the links. The same people who thought my forecasts were nuts then are the ones who now insist that my current forecast is just as crazy.

Thus far 2008 has been a sobering experience for investors of all shapes, sizes, and economic philosophies. With the weakness of America's financial infrastructure now fully in view for all who have the stomach to look, stock and commodity markets around the world are showing instability, confusion, and fear. Despite the strong fundamentals of many overseas economies (which stand in sharp contrast to our domestic woes), foreign stocks are inexplicably selling off in concert with the Dow.

In particular, at a time when mining and energy stocks should be trading up in with the continued long term uptrend of oil and metals, they are instead seizing on any pullback in commodity prices as an excuse for significant sell-offs. Other strong sectors, such as agriculture and infrastructure, which should be supported by the continued economic expansion in Asia, are instead heading south. Despite strong earnings, low multiples, and bright prospects, foreign stocks are being lumped in with their tottering American counterparts, who are dealing with actual losses and a recessionary economy. As history has shown time and again, over the short to medium term markets are capable of stunning irrationality.

In this time of near-panic it is vital to focus on the fundamentals while everyone else runs with the herd. Investors with ice water in their veins, who understand that the world will ultimately shrug off their exposure to the American economy, will be rewarded for scooping up plum assets at bargain basement prices. However, we recognize that when it comes to people's life savings, ice water may be in short supply. As a result, we recommend that during this time of transition, investors consider focusing on extremely conservative stocks that pay good dividends while providing a very high degree of insulation from the world at large.

Such companies do exist. And although they may not have intriguing growth potential, they do offer the attractive virtue of steady performance and predictable payouts. By seeding portfolios with many of these "steady Eddies," investors can position themselves to survive the current turbulence. With their income preserved, investors will have the flexibility to move into "riskier" assets once the dust settles and foreign markets regain their upward momentum.

Euro Pacific has identified a number of stocks that fit this particular bill.

Company #1

Our first selection comes from Canada and is an energy services trust. The company pipes natural gas, crude oil, and tar sands bitumen (synthetic crude oil) across Canada and into the United States. Its unit price has been rising steadily since 2004 even with a drop on Halloween 2006, when the Canadian government announced it would tax the trusts as corporation come 2011. Its unit price is higher today than the day of the announcement.

In the pipeline business, oil & gas producers buy space in the pipeline for a period of time. Through put of energy is not the driver of revenue. If the oil producer buys space in the pipeline, but then does not use it, the producer still pays for the contract. Thus, the pipeline's revenue is not as sensitive to changes in spot prices as the producer's would be.

Increased demand for energy in North America has pushed revenue higher over the years. The company pays a distribution per unit today that is 50% higher than it was 10 years ago.

One of the long-term energy assets Canada possess is the Athabasca tar sands. It is estimated that Canada's oil reserves in its tar sands is second in the world to only Saudi Arabia's. Syncrude, the world's largest crude oil producer from tar sands, uses the company to pipe crude oil produced from the sands. This is business that should provide increasing revenue for years to come.

52 week high was C$18.70 in June of 2008 and its low was C$15.67 in August of 2007. The unit price is near C$16.70. Same as US$. Approximate distribution yield is 8.4%. US$2.2 billion in market cap.

Company #2

The second company is a utility formed in Hong Kong in 1889. They were Hong Kong's 1st electrical utility. They supply electricity to Hong Kong and to surrounding islands.

We think eventually there will be a decoupling of Asian dependence on American consumption. When that happens, many Chinese manufactures will need to change their marketing focus away from America. That may happen fast or slowly, and might result in slowing revenue until the mainland picks up the slack. An electric utility sells its juice to locals only right now and can shunt electricity away from those not needing as much to those with a greater demand. We think the utilities are situated perfectly to maintain value.

52 week high was HK$52.50 in March of 2008 and its low was HK$37.45 in August of 2008. Stock price is near HK$45.75 (US$5.86). Market cap is about US$12.5 billion. Yield about 4.4%.

Investing in foreign securities involves risks specific to international investing, such as currency and political risks. There can be no guarantees of success in pursuing any of the strategies we recommend, or that any of the specific companies will gain in value. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a financial accident resulting from the veritable explosion of global liquidity, increasingly risk-taking and its attendant volatility; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. Euro Pacific has not independently verified the information supplied by the company, and cannot make any representations as to its accuracy. This material is for private use of the subscriber; it may not be reprinted without permission.

© Euro Pacific Capital Inc. All rights reserved. 1-800-727-7922
10 Corbin Drive, Darien, CT 06840

Many investors are so scared by the wild gyrations the stock market has seen of late that they've jettisoned everything - including the kitchen sink - in their search for safety.

Not only is this a massive mistake from a timing standpoint, it's also a major misstep because of all the dividend income those folks are going to forego. Taken together, investors who have embraced this kind of "abandon-ship strategy" will find that they've dealt themselves a one-two knockout punch that will put their portfolios down for the count.

Let me explain...

Dividends are the Key to Profits

Giving up dividend income is never smart, but it's an especially egregious error during messy markets like the one we're navigating now. Research shows us why. For instance, studies show that:

• Dividend-paying stocks tend to be more stable than their non-dividend paying brethren, particularly during rocky stock markets. In other words, stocks that have income streams attached are treated better, especially when the going gets tough.
• Dividend-paying stocks outperform non-dividend paying stocks by even more in down markets than they do in up markets.
• By consistently reinvesting dividends during down markets, investors can substantially expand their asset base, which puts them way ahead of the game when markets recover and stock prices soar - as they always eventually do.

The concern, however, is that we're swirling down into a recession. Maybe we are. Maybe we're not.

Either way, we've been here before. And this malaise - no matter how bad it gets - will pass. Just think about where we've been: There was the Price/Earnings (P/E) Ratio peak crash of 1901; the Great Crash of 1929, the "Black Monday" stock market crash of October 1987, the Asian Contagion of 1997, loan defaults in South America and Russia, and even then 9/11 terrorist attacks.

Each of these ultimately passed.

And each time, dividend-paying companies led the way higher. And the savvy investors who owned them watched as their own portfolios easily outperformed the market averages, and roundly trounced the returns of portfolios that were light on dividend-paying shares, or that excluded those income-oriented shares altogether.

The Numbers Tell the Story

According to Ned Davis Research, dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005 (and keep in mind that this research study started at the worst possible time in the past 40 years - just prior to the "bear market" of 1973-1974, which dragged on for 21 months and caused shares to lose 48.2% of their value.) Non-dividend paying stocks, in contrast, posted gains of just 4.1%.

Think of it another way: An investment of $1,000 in a portfolio of dividend-paying shares during the period covered by the study would have turned into $2,629; that same $1,000 invested in non-dividend-payers would have turned into $1,598. In other words, the dividend-paying portfolio was 65% larger than the non-dividend paying portfolio.

When separated into three groups - rising-dividend-payers, static-dividend-payers, and non-dividend-payers - the difference is even more dramatic over the timeframe in question.

The returns on stocks that are boosting their dividends were more than four times the returns of non-dividend-paying stocks. The rising-payout shares also outperformed the static-dividend payers by 136%.

According to Yale University's Robert Schiller, Wharton Business School's Jeremy Siegel and other noted researchers, the advantage that dividend-paying stocks can have over non-dividend payers can be as much as 25:1, depending upon the time frames studied. Dividends can account for as much as 97% of a stock's total return.

To understand the advantages dividends can provide an investor during a down market, let's take a look at the implosion of the dot-com bubble in 2000.

According to Morningstar research, the Standard & Poor's 500 Index lost 9%, while dividend-oriented mutual funds - including high-yielding stocks in the financial-services, mutual-fund and real-estate sectors - gained anywhere from 10% to 30%.

Fast forward again to include both the dot-com decline and the subsequent recovery through last summer: Once again, dividend-paying stocks continued to outperform non-dividend-paying stocks by a wide margin.

There's a very good explanation for this out-performance: Dividend-paying stocks feature a much lower "beta," meaning that they are less volatile than the overall stock market. Granted, the downside to this is that dividend-paying stocks don't accelerate as fast as, say, non-dividend paying growth stocks in a broad-based bull market. But unless you're a hard-core stock trader, that's a fact you really don't need to worry about.

During a 35-year-period that included some really big market downdrafts and bear-market cycles - as well as some highly bullish stretches - a $100,000 investment in static dividend payers in 1972 would today be worth $3.2 million. That same hundred grand invested in dividend-growers would be worth $4 million.

The same investment in non-dividend-paying stocks would be worth a paltry $240,000.

Again, the period in question started at one of the most inopportune times investors have been forced to face in modern history - just before the start of the '73-74 bear market.

The Moves to Make Now

Regardless of how appealing this strategy sounds, you don't want to rush into anything -not even dividend-paying stocks.

The key reason: It's very possible that the current stock-market downdraft will continue. Therefore, it makes sense for you to ease your way a little at a time into dividend-paying shares. One of the simplest ways to accomplish this "steady-as-she-goes" strategy is to simply to allocate your capital into equal parts and invest it in equal amounts over the next three months to six months.

Because dividend-paying stocks tend to be downdraft resistant, portfolios with higher yields tend to last longer and pay stronger. That's something that's important to all of us, but especially to investors who are nearing retirement, or who have already retired.