Global Stocks: Cheap but Risky Europe controls the fate of international markets in 2012 Uncertainty ruled world

d markets in 2011, but one thing was sure: A big bear clawed foreign stocks. Through November 4, the MSCI EAFE index, which tracks stocks in developed nations, tumbled 9%; the MSCI Emerging Markets index fell 12%. Over the same period, Standard & Poors 500-stock index was flat. Expect volatility through the early part of 2012, says Virginic Maisonneuvc, comanager of Vanguard International Growth Fund, in part because of unresolved issues from 2011. Details on how to solve Europes gov- ernment-debt crisis still need to be ironed out. Economic growth in China, the worlds growth driver, is slowing, even as inflation worries weigh on markets from Asia to Latin America. Europe controls the fate of international markets in 2012. As Greece teeters on the precipice of default, it threatens to take Italy, Spain and France with it. If Greece restructures its debt in an orderly, negotiated process, it could renew confidence and boost international markets in the latter half of 2012. But even with a so-called structured default, the future looks grim. How docs Europe get its mojo back? says Katherine Nixon, chief investment officer with Northern Trust. Its a long-term issue with a lot of pain. Life in Europe, with an average 10.2% unemployment and just 1.6% gross domestic product growth in 2011, already feels recession-like. Growth in 2012, at 1.1%, will be anemic. But European stocks arc cheap: On average, they trade at 10 times estimated 2012 earnings. (The average historical price-earnings ratio is about 17; the S&P 500 trades at 12 times earnings.) Says David Herro, co-manager of Oakmark International Fund: European multinationals have gotten clobbered. This is a good opportunity to get in. If Europe remains risky and developed markets stay volatile, then emerging markets will get even choppier. How China, the largest emerging economy, handles its slowing economic growth is key. If officials lower interest rates too far or too soon, a real estate bubble could re-inflate. Wait too long and growth could slow too much. Slow is relative. Even pared down, Chinas GDP growth, estimated at 9% in 2012, is impressive. Growth in emerging economies overall should come in at 6% for 2012a lot higher than predicted growth in the U.S. and Europe. Meanwhile, the MSCI Emerging Markets index trades at 9.5 times 2012 earnings, well below the historical average of 15. It may be a great time to buy foreign stocksthe choppier the market, the better the chance to pick up good companies at a discount, via mutual funds with a proven stock picker at the helm. We like OAKMARK INTERNATIONAL (SYMBOL OAKIX) and TWEEDY, BROWNE GLOBAL VALUE (TBGVX). Buy in moderation, during downturns. Theres no need to put all the money in at one time, says Oakmarks Herro. We also like VANGUARD INTERNATIONAL

GROWTH (VWIGX), where co-ma nager Maison neuve is focusing on large, European-based multinationals, such as Nestle and Tcsco, that also rely on regions outside the euro zone for a chunk of revenue. In China, shes betting on the countrys consumersretail, food and beverage company China Resources, for examplerather than its exporters, Dont make a Deal you dont Intend to Honor Q. Im a junior acquisitions guy in a large real estate development company, and Ive been assigned to work closely with our senior partner. On my first deal, he told me to bid high on a property to make sure our firm beat out the other bidders, but not to plan on actually paying that price. We will negotiate it down after the contract is signed, when we find lots of issues with the property during due diligence, he said. On the eve of settlement, the seller wont have the time or inclination to put it back on the market, and hell accept our lower offer. This man is a mentor to me, but Im troubled by his hardball approach to deal-making. You should be, because what he told you to do is unethical. If this is the way the firm does business, you should find someplace else to work. Ive heard of some legendary developers who have a bad reputation for doing this, under the principle that the negotiation begins, not ends, when the contract is signed. An ethical businessman bids what he truly believes the asset is worth and what he is fully committed to paying. It is dishonest to make a bid-and sign a contract-that you dont intend to honor. Sure, there are reasons a contract buyer may legitimately decide to walk away from a deal or renegotiate the price. For example, he might discover during due diligence that the property was misrepresented by the seller. Or a new problem might surface. calling into question the real market value. At that point the contract buyer and seller have a choice to make-keep the deal alive under different terms or let the contract lapse. Sellers can protect against a bad-faith bid by requiring a large deposit thats subject to forfeiture, making sure that the property is accurately represented, and being prepared to enforce the original contract, if necessary.

Pass the E-Hat Online communities Can help you Raise start-up Cash FOR PHU NGUYEN, 25, AND Peter Seid, 22, inventing Romo, a robot controlled by a smart phone, was the easy part. The hard part for the co-founders of Romotivc was gauging the markets interest in their prototype, finding developers to create phone applications for it and raising money to assemble more robots. They turned to Kickstarter, a Web site anyone can use to gather funds from supporters. Last fall, the Seattle pair raised more than $80,000 in about a monthmore than double their $32,000 goaland found like-minded innovators, too. Sites such as Kickstarter, IndieGoGo and Peerbackers help people raise money for projects of all sizes, from films to furniture-making. You explain your idea and offer rewards to backers. Romotive promised a button to folks who pledged $2, for example, and a trio of robots to those contributing $212. Some sites release funds raised only if you meet your goal. Many charge a fee, often about 5% of the money you raise. It helps to set clear and realistic goals for the money you want to raise and the number of products you can prepare and deliver. Think carefully about how youll engage the network. Use videos and photos to showcase your vision. And set aside plenty of time. On top of developing the robots, Romotives founders spend one to two hours per day updating their backers on the firms progress and responding to e-mails, Nguyen says,

PRACTICAL INVESTING - Hard-Knock Lessons Experience is a great teacher, and arguably its most instructive when youve made a big mistake. When it comes to investing, Ive learned a few hardknock lessons. Lets start with my investment in Price Club, a warehouse-store pioneer that in 1993 merged with what is now Costco Wholesale (symbol COST). I bought shares in Price Club in the mid 1980s. But when they had barely moved after three years, I lost patience and soldeven though the company was growing impressively. The stock almost immediately soared. Ouch. Dumb move. I had a small IRA with a broker in the late 1980s. I loved animated movies, so I slammed every dollar into shares of Disney (DIS). About that time, Disney brought in new management and was starting to ramp up its long-moribund animation unit. Because investors were skeptical about Disneys prospects, its stock was volatile. I figured I could take advantage of that without tax consequences by trading inside my IRA, so I sold when the stock would swing up and bought back the shares when the price would

fall back down. I thought I was brilliant. But then, after one such sale, Disney released The Little Mermaid, which turned out to be a smash hit and was a precursor of a decade that would see Disneys stock quadruple. I missed it. These experiences taught me that I am neither superpatient nor psychic. I f I want to make money in stocks, I need to be disciplined. Thus, I focus on a companys fundamental numbers and try to avoid getting caught up in trends, fads, fear and greed. Eventually those things fade, but companies that can deliver sustainable earnings and dividend growth survive and prosper. As a shareholder, I prosper with them. Now back to the Kiplinger portfolio Im creating. In my previous column I wrote that I had purchased shares of INTEL (INTC), CORNING (GLW) and SPIRIT AIRLINES (SAVE). I also invested in VANGUARD TOTAL STOCK MARKET ETF (VTI) to serve as a market proxy. By the close on November 4, VTI had gained 6%; Intel, 3%; Corning, 5%; and Spirit, 16%. Dont read much into one months performance. But so far, so good. The portfolio is heavy in tech, so I need to diversify. I will buy some of the stocks I recommended in the December issue (8 Blue Chips to Buy Now), but I need to wait for Kiplinger:s trading restrictions to expire. Meanwhile, as part of my highly unscientific method of identifying attractive stocks, Im talking to friends, reading financial statements, and clicking through Yahoo Finance to find companies that I think Wall Street is punishing unfairly. And because Im basically a conservative investor, I want to hedge my bets by looking for solid dividends that are well supported by a companys cash flow. (Even if a stock doesnt appreciate as much as I expect, I can console myself by collecting those quarterly payments.) I decided on three companies: health care giant JOHNSON & JOHNSON (JNJ), bought at $65.30; PPL CORP. (PPL), a Pennsylvania-based utility, at $29.63; and KKR FINANCIAL (KFN), at $8.43. Kiplingers has recommended both JNJ and PPL in the past, largely on the basis of their strong balance sheets, cheap prices and generous dividends. KKR Financial is a Lazarus-like story brought to my attention by my 19-year-old son, who just started investing. Founded as a real estate investment trust that invested in mortgages, and operated by Kohlberg Kravis Roberts, the one-time kingoflever- aged buyouts, KKR Financial got crushed in the 2007 mortgage meltdown. In 2008 it sold off a big chunk of its mortgage holdings and converted to a regular company that now invests in risky debt, from junk bonds to syndicated bank loans. Its strategy may be chancy, but the top execs and

directors, including a former Wells Fargo president, Paul Ha-zan, are top-notch. At my purchase price, the stock sold for 4 times KKRs earnings over the previous year and yielded a tasty 8.5%. I am neither super-patient nor psychic. If I want to make money in stocks, I need to be in disciplined.

CA SH IN H A ND - My Best Bond Ideas Treasury bonds are no longer relevant for the likes of you and me. They have evolved from a source of safe income to a mere repository for frightened money managers, banks and other institutions that are looking for a place to park cash and dont care how much they earn, says Margaret Patel, a portfolio manager for Wells Fargo in Boston. How absurd is the Treasury bond market? Over the past year, consumer prices rose 3.9%. But as of November 4, the benchmark ten- year Treasury yielded only 2.1%. So even if inflation fell by onethird, you'd still come out behind with a Treasury bondunless yields continued to drop, resulting in additional appreciation in the value of these bonds. Falling yields explain why Treasuries rocked in 2011 (through November 4, the ten-year Treasury returned 14%). Keep all that in mind as you plan your income strategy for the coming year. Yes, yields could drop even further as investors scramble for safety every time the euro zone or some big bank threatens to blow up. But interest rates can't fall below zero, and the sky is the limit when they start going up. That said, the ten-year yield is unlikely to return to its recent high of 3.75%, hit in February 2011. But assuming global markets calm down, a move to 3% at some point this year is likely. If the ten-year Treasury were to end the year at 3%, youd lose nearly 6% on a total- return basis. The good news is that you have alternatives that deliver more income with less risk. Kiplingers doesnt expect a recession in 2012, so you can invest in bonds that arent government- guaranteed without worrying about a slew of defaults and rating downgrades. At the same time, we dont envision the kind of brisk economic growth that would stoke inflation and cause massive selling of bonds. Below are my best income ideas for the year ahead. Mortgages. Ginnie Maes, which pass along interest from federally backed home loans, are sensible for

your short-term savings. With Ginnies, you get a current yield of 3% or a tad more from bonds that arc fully backed by Uncle Sam. The best way for most people to invest is through low-cost funds, such as VANGUARD GNMA (SYMBOL VFIIX) and FIDELITY GNMA (FGMNX). Both yield 3.2% and have three-fourths of their assets in securities issued at interest rates of 4% or higher. If rates rise, Ginnie Mae funds will hold up better than Treasury funds. Corporates. Most financial companies are on the mend, which is good because they are the biggest issuers of investment-grade corporate bonds. The phone companies, as well as utilities and some bluechip firms, such as Pfizer, are definitely sound credit risks. Yields on high-grade corporate bonds have fallen to about 4%, but that's acceptable. Among funds, good choices are T. ROWE PRICE CORPORATE INCOME (PRPIX), which yields 4.3%., and ISHARES IB0XX$ INVESTMENTGRADE CORPORATE BOND (LQD), an exchangetraded fund that pays 3.9%. Municipals. The relationship between what state and local bonds yield and what the Treasury pays is out of whack, with munis often yielding moreeven before factoring in the tax-exempt status of their interest payments. To cite one example, Georgi a genera 1 - obi igat ion (GO) bonds maturing in 2023 and rated AAA by Standard & Poorsa step better than S&P's rating for U.S. debtrecently yielded 2.7%. Thats equivalent to a taxable yield of 4.2% for an investor in the 35% federal tax bracket. The yield of similar-maturity Treasuries was 2.1%. A caveat: Though municipal finances are improving, local GO bonds and speculative, construction- related bonds (such as airport expansions) could suffer if Congress cuts aid to states, and governors in turn beggar counties and cities. So its okay to own state GOs, but otherwise buy revenue bonds backed by essential services, such as water bills and road tolls. FIDELITY INTERMEDIATE MUNICIPAL INCOME (FLTMX), a member of the Kiplinger 25, yields 2.4%. Ginnie Maes, which pass along interest from federally backed loans, are sensible for savings.