Companies that survived the massacre lost 90% to 99% of their stock value.  In the last six to nine months the patients have been moved from the ER and are mostly stabilized.  Many are still under-capitalized and not financially healthy by conventional standards.  Could that change?  There is one factor that the InvestmentBuddy thinks may have been overlooked.  Inflation. These firms borrow money from savers and those that buy packaged securities.  They loan it out in the form of loans to homeowners, businesses and to the government in the form of bonds.  What happens if the government prints enough money to cause massive inflation.  The cause and effect are well documented.  Any country that cranked-up the printing presses caused inflation.  It is the effect of more dollars (or other currency) chasing the same amount of goods and services.  There is also the substantial debt that can lead the nation’s economy into the inflation spiral.

What is the result of inflation on the “Zombie Stocks?”  Inflation makes the value of the underlying collateral (homes, equipment, business) worth more.  Not more relative to real currency like gold, but worth more in dollars.  Since the loans are in dollars, the borrowers are more likely to pay their notes.  If home become worth more and more (dollars), borrowers will be less likely to default.

The drop in the value of the zombie stocks is based on two primary fears, loss of profits and the threat of survival.  What if the threat of survival were eliminated by the influence of inflation?  Well, it is unlikely their common stock prices will rise all the way to the levels of their pre-2008 prices.  What if the new influence of inflation caused these stocks to bounce back to 25% of their former highs?

InvestmentBuddy’s Top Zombie Picks

• CapitalTrust (CT)
• Fortress Investment Group (FIG)
• Freddie Mac (FRE)
• SLM Corp – Sally Mae (SLM)
• E*Trade Financial (ETFC)
• MBIA Inc (MBI)
• Ambac Financial (ABK)

If a stock had lost 95% of its value in 2008 and 2009, a $50 stock would be worth $2.50 today.  If that equity were to retrace to a level of 25% of its former value, it would rise to $12.50.  That would be a 500% increase from the current quote.  Possible?  InvestmentBuddy does not know.  What if 1/2 of your zombie protfolio makes the climb back, and 1/2 of your zombie portfolio dies through bankrupcy or government take-over/liquidation?  The combined result would be a 250% appreciation in your zombie portfolio.  That would be a great return even if it takes 10 years to accomplish.  We don’t know the chance of that happening.  Let us know what you think.

If you have several children it will cost several times the cost of a new home to put those little ones through school. What is a family to do? There is actually plenty you can do to prepare for this expense.

1st -  START EARLY

The rules of compounding cannot be overlooked.  Begin the practice of saving for your child’s education as a regular discipline in your family’s financial plan.  Sacrifices in the early years of the child’s life will take much more investing later in life to equal the same impact.

2nd – REVIEW YOUR APPETITE FOR RISK

This part may sound counter-intuitive, but the InvestmentBuddy suggests investing in aggressive growth investments in the early years of the child’s investment years.  From birth to 13 years old, you should invest in individual stocks or mutual funds that are in growth areas such as high-tech and biomedical companies.  There may also be stocks that are still beaten-down from the recent downturn in the market.  Review our report  on Zombie Stocks.

3rd – MAKE REGULAR CONTRIBUTIONS

This is the “secret sauce” to most large family fortunes.  Establish a regular college savings in the name of the child.  You may begin with a brokerage account or a Dividend Reinvestment Plan (DRIP) in the child’s name.  It can be established as a Uniform Gift To Minors Act Account (UGTMA).  Under this type of account, income that is generated through dividends and interest income is taxed at the child’s rate.  Unless the account is very large, there will be no tax liability.

4th – MAKE IT FUN

It is unlikely your 5 year old son or grand-son will care about the appreciation in Apple Corporation’s (AAPL) stock.  A 15 year old, however may like seeing his or her portfolio grow.  It is also a great way to model your savings trends in real time.  Let them see how investments are paid as a priority, like church donations, life insurance and car payments, even in months when money is tight.

5th – REVIEW YOUR STATE’S EDUCATIONAL SAVINGS INCENTIVES

Some states offer incentives to allow parents and grandparents to pay future tuition at current prices, by prepaying.  Check your local university resources.

6th – SHOP COLLEGE LIKE IT IS THE MAJOR PURCHASE IT IS

InvestmentBuddy.com helps people prepare for the big expenses.  This IS THE BIG ONE.  Shop colleges as you should.  Look at educational opportunities in other states.  Consider out of state tuition.  Seek scholarships.  If you have to borrow some of the money, shop several loan opportunities.  Don’t stop at the first choice.  [At the time of this post, congress is considering taking over SLM Corp (Sally Mae).  If major changes pass, we will attempt to post any significant changes here.]

As a general rule, things that are affected by inflation for several years usually fall.  Our latest example is the US housing market.  Keep your eyes on the college costs.  Look for opportunities.  In our market, for example, a local university is offering FREE tuition to post-9/11 military servicemen.  Keep your eyes wide open and let InvestmentBuddy know of specials that would be helpful to other readers.

At the current price of $43.00, this represents a gain of 32% in 11 days. Other equities like Fannie and Freddie have appreciated simmilarly over the same period, but with much greater risk than CRDN.

Recently, however, sophisticated order types have entered the stage.  These platforms allow traders, including large institutional traders, to “hide” orders from the visible orders.  Conditions allow the orders to not appear in the order book until a certain price is reached.  They can also be configured to allow an order to “evaporate” when the market approaches the price.  the net result is that the information being viewed is not credible.  Since it is not credible, it is actually counter-productive.

What is a trader to do? The most reliable data available is HISTORICAL.  Price & Volume.  That information represents what real buyers paid to real sellers in the given time frame, and at what volume.  One day the regulators may outlaw this deceptive order practice,  In the interim, be aware that what you think you see on your Level II screen may be Smoke and Mirrors.