A Review of Ron Paul’s Liberty Defined

April 25th, 2011

Sometimes Ron Paul seems too good to be true. For decades he has championed the cause of liberty and sound monetary and geopolitical policy. He has done this in the very heart of the Leviathan state even as the federal government has accelerated its expansion in the postwar years. Further Dr. Paul has repeatedly presented his case in print in clear language. Liberty Defined is the latest timely addition to those efforts.

The format is one we’ve seen before in books like Libertarianism A to Z. In Liberty Defined, the introduction lays out the overarching principles of liberty and anti-authoritarianism. The book itself then devotes each chapter to an individual issue, starting with abortion, then moving through things like Austrian economics, capital punishment, evolution and creation, global warming, hate crimes, Keynesianism, taxes, unions and much more. The chapters are fairly short at just a few pages each, written in clear language that seeks to discuss and educate. Each chapter is a delight to read, particularly for lovers of liberty, but even when you don’t fully agree with Dr. Paul, you’ll find his position compelling and his honesty and consistency incredibly refreshing.

“The phrase ‘Austrian School’ or ‘Austrian economics’” Dr. Paul writes, “is not something I ever expected would enter into the vocabulary of politics or media in culture. But since 2008, it has. Reporters use it with some degree of understanding, and with an expectation that readers and viewers will understand it too. This just thrilling to me, for I am a long-time student of the Austrian tradition of thought.”

And no doubt many readers will share Dr. Paul’s joy. They will also note that it is Dr. Paul himself who has been tirelessly campaigning for the free market principles of the Austrian School for the past several years. He tells about the founder of the Austrian School, Carl Menger (1840-1921) “who wrote that economic value extends from the human mind alone and is not something that exists as an inherent part of goods and services; valuation changes according to social needs and circumstances. We need markets to reveal to us the valuations of consumers and producers in the form of the price system that works within a market setting.”

Dr. Paul notes that Keynes’ “entire agenda presumes the existence of a wise activist state that is involved in every level of economic life. Liberty was not an issue that concerned him.”

The Austrian School, however, believes, “We are not cogs in a macroeconomic machine; people will always resist being treated as such.”

Liberty Defined is certain to make people on both sides of the left-right political debate uncomfortable. Dr. Paul decries the welfare state beloved by those on the left, but repeatedly shows that such a state is just the other side of the coin of the interventionist foreign policies of those on the right. Dr. Paul himself is a man of religious and spiritual conviction, but he also doesn’t shy away from analyzing how the neoconservatives of the modern right use adulterate religion and patriotism to garner support for their imperialist adventures.

“Instead of religious beliefs being the cause of war, it is more likely that those who want war co-opt religion and falsely claim the enemy is attacking their religious values. How many times have we heard neoconservatives repeat the mantra that religious fanatics attack us for our freedoms and prosperity? Neoconservatives use religion to stir up hatred toward the enemy.”

Dr. Paul also isn’t given to idealism. He admits, for example, that a truly libertarian position would have porous borders, but he points out that that just isn’t possible right now. He notes that even in a stateless society, all property would be privately owned and those property-owners at the borders would have the right to decide who cross their land. Dr. Paul handles the issue deftly and his proposals of work permits and conditional green cards as opposed to deportation, among other things, struck even this anarcho-capitalist leaning reader as reasonable.

And Dr. Paul is certainly no anarchist, but he is close enough for government work. He is the kind of politician even an anarcho-capitalist could love. Dr. Paul is well versed in the dangers of governments and their tendencies to grow; yet he thinks there is room in the world for a minimal amount of government. It’s a delicate balance. He pulls it off with aplomb. In the chapter on prohibition he says:

“Government should not compel or prohibit any personal activity when that activity poses danger to that individual alone. Drinking and smoking marijuana is one thing, but driving recklessly under the influence is quite another. When an individual threatens the lives of others, there is a role for government to restrain that violence.

“The government today is involved in compulsion or prohibition of just about everything in our daily activities. Many times these efforts are well intentioned. Other times they result from a philosophic belief that average people need smart humanitarian politicians and bureaucrats to take care of them. The people, they claim, are not smart enough to make their own decisions. And unfortunately, many citizens go along, believing the government will provide perfect safety for them in everything they do. Since governments can’t deliver, this assumption provides a grand moral hazard of complacency and will only be reversed with either a dictatorship or a national bankruptcy that awakens people and forces positive change.”

Liberty Defined is layered with a practical view of the political realities, but it never fails to stay true to its moral core. Dr. Paul repeatedly points out that many of his solutions — which ultimately come down to the federal government getting out of the way — simply won’t be applied because the federal government is just too intertwined with the problem.

But Dr. Paul never wavers. With the fearlessness for which he has become famous, Dr. Paul continues to assault all the bad central planning policies and popular misconceptions that allow them to continue even in the face of failure.

On Keynesianism:

“…Something did change with the publication of The General Theory. Keynes gave the governments of the world a seemingly scientific rationale for doing what governments wanted to do anyway.”

On unions and government labor laws:

“Union power, gained by legislation, even without physical violence, is still violence. The laborer gains legal force over the employer. Economically, in the long run, labor loses.

“…If only it were so easy to help the working class. Just dictate wages and everyone will be financially better off. Unfortunately, this leads to disastrous results, whether it’s the prolonging of the economic mess as it did in the 1930s or the tragic results in American industry that we’re witnessing today.

“What good is it to mandate a $75 per hour wage if there are no jobs available at that price? What good is a minimum wage of $7.50 if it significantly contributes to overall unemployment?

“The reaction to the economic argument explaining the shortcoming of labor unions and minimum wage laws is that it’s heartless and unfair not to force ‘fairness’ on the ruthless capitalists. But true compassion should be directed toward the defense of a free market that has provided the greatest abundance and the best distribution of wealth of any economic system known throughout history.”

The chapter on taxes, however, is probably the best (and certainly this reviewer’s favorite). It sums up so many of the important themes: private property, liberty versus coercion, public education, economic misallocation, and the voracious appetite of the state.

“‘Taxes are the price we pay for civilization,’ according to Oliver Wendell Holmes. This claim has cost us dearly…If we as a nation continue to believe that paying for civilization through taxation is a wise purchase and the only way to achieve civilization, we are doomed.”

I am tempted to quote the chapter in its entirety, but at this point I would simply urge you to buy the book so you can read it there, along with the rest of this wonderful work.

Regards,

Gary Gibson
Managing Editor, Whiskey & Gunpowder

April 25, 2011

P.S.: Click here to get your copy now.

A Review of Ron Paul’s Liberty Defined originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
A Review of Ron Paul’s Liberty Defined




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

What China’s Foray into Fine Art Means for the World Economy

April 25th, 2011

As we go to the presses this afternoon, gold is rallying (again), silver is rocketing (again), wheat is soaring (again) and just about every other asset on the planet that isn’t a US dollar is moving up in price (again).

The beleaguered greenback keeps trying to find a place to stand, but only seems to find places to fall. Already this year, the dollar index has dropped 6.3% – wiping out all of the S&P 500’s gains for the year to date. Another 6% drop would take the dollar index to an all-time low. Little wonder that investors are flocking to gold, silver and every other asset that seems a plausible alternative to dollars. Even fine art is catching a bid…but maybe too much of a bid.

Derek Thompson, writing for The Atlantic, suggests that record-setting auction prices for fine art may be “a leading indicator of economic collapse.” In his column, entitled, “The Art of Bubbles: How Sotheby’s Predicts the World Economy,” Thompson highlights China’s conspicuously large role in the red-hot market for fine art. “[China’s] blaze of auction records,” he explains, “is looking eerily reminiscent of 1987 Japan and 2007 America… In four years, China has zoomed past [the US] from the world’s fourth-biggest fine art scene to the world’s largest auction market for art.

“In May 2010, an anonymous bidder believed to be Chinese forked over $106 million for ‘Nude, Green Leaves, and Bust’, the most ever paid for a Picasso,” Thompson notes. “Five months later, three bottles of Chateau Lafite 1869 sold at Sotheby’s for 30-times their pre-auction estimate, at $230,000 per bottle to Chinese bidders. In November, an 18th century vase sold for $70 million. Eight figures for a vase… Then, just last week, Chinese buyers helped Sotheby’s and Christie’s set (yet another) record by bidding up the price of a Chinese vase estimated to fetch $800 all the way to $18 million – a 22,000% mark up!

“That’s the kind of fever pitch The Economist captured when it reported ‘astonishing bidding’ by wealthy Chinese across the globe as ‘record after record has fallen away as newly wealthy collectors from mainland China have piled into salerooms in London, New York and Hong Kong.’”

China’s record-setting presence in the fine art market is not necessarily a bad thing, but if the recent past is anything close to prologue, the Chinese economy is heading for a hard landing.

Price of Sotheby's Stock Through Various Financial Cycles

“China’s meteoric rise in the global auction world might be a sign of well-earned wealth,” Thompson explains. “But periods of record bidding are scarily accurate bubble predictors, according to Vikram Mansharamani, author of Boombustology. They’re a ‘symptom of overconfidence and hubris’ as a newly rich society spends its easy money with exponential flamboyance.

“China’s appetite for fine art isn’t a stray indicator, Mansharamani says. It’s a telltale clue from a disaster movie we’ve seen play out at least three times before,” Thompson continues. “In the last 20 years, Sotheby’s stock has experienced four sharp peaks. In the late 1980s, Japan had been ‘the center of gravity’ in the international art market. But its economy imploded, sending Sotheby’s stock reeling. Ten years later, the Internet bubble drove another auction boom among Silicon Valley newbies, and the bubble burst again. Ten years later, we watched the same film play out. This year could be deja vu, all over again…all over again.

“Mansharamani makes an eerie supporting argument for a bubble in China: skyscrapers,” Thompson concludes. “In 1929, the world’s three tallest buildings were in New York. In 1997, before the Asian financial crisis, the Petronas Towers took the title from Sears Tower. Thirteen years later, the record-setting Burj Dubai was erected just as the latest financial crisis hit Dubai. It turns out that the world’s ten tallest new buildings are like a worldwide pulse of bubblicious economic activity. In 2015, he notes, Chinese skyscrapers will occupy spots #2, 3, 5, 9 and 10.”

Share Price of Sotheby's vs. Shanghai Composite Index

A final corroborating data point may be the Chinese stock market itself. Despite still-titanic credit growth in China – and despite unrelenting headlines of booming economic growth – the Shanghai Composite Index has failed to make any net progress during the last six months. As such, Chinese stocks are diverging noticeably from Sotheby’s – a stock the index has tracked very closely for most of the last two decades. While Sotheby’s stock is busy challenging its all-time high, the Shanghai Composite remains 50% below its all-time high of October 2007.

Maybe it’s still too early to panic about these various signs of cultural excess and stock market distress. But it’s not too early to worry.

Eric Fry
for The Daily Reckoning

What China’s Foray into Fine Art Means for the World Economy originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
What China’s Foray into Fine Art Means for the World Economy




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

What China’s Foray into Fine Art Means for the World Economy

April 25th, 2011

As we go to the presses this afternoon, gold is rallying (again), silver is rocketing (again), wheat is soaring (again) and just about every other asset on the planet that isn’t a US dollar is moving up in price (again).

The beleaguered greenback keeps trying to find a place to stand, but only seems to find places to fall. Already this year, the dollar index has dropped 6.3% – wiping out all of the S&P 500’s gains for the year to date. Another 6% drop would take the dollar index to an all-time low. Little wonder that investors are flocking to gold, silver and every other asset that seems a plausible alternative to dollars. Even fine art is catching a bid…but maybe too much of a bid.

Derek Thompson, writing for The Atlantic, suggests that record-setting auction prices for fine art may be “a leading indicator of economic collapse.” In his column, entitled, “The Art of Bubbles: How Sotheby’s Predicts the World Economy,” Thompson highlights China’s conspicuously large role in the red-hot market for fine art. “[China’s] blaze of auction records,” he explains, “is looking eerily reminiscent of 1987 Japan and 2007 America… In four years, China has zoomed past [the US] from the world’s fourth-biggest fine art scene to the world’s largest auction market for art.

“In May 2010, an anonymous bidder believed to be Chinese forked over $106 million for ‘Nude, Green Leaves, and Bust’, the most ever paid for a Picasso,” Thompson notes. “Five months later, three bottles of Chateau Lafite 1869 sold at Sotheby’s for 30-times their pre-auction estimate, at $230,000 per bottle to Chinese bidders. In November, an 18th century vase sold for $70 million. Eight figures for a vase… Then, just last week, Chinese buyers helped Sotheby’s and Christie’s set (yet another) record by bidding up the price of a Chinese vase estimated to fetch $800 all the way to $18 million – a 22,000% mark up!

“That’s the kind of fever pitch The Economist captured when it reported ‘astonishing bidding’ by wealthy Chinese across the globe as ‘record after record has fallen away as newly wealthy collectors from mainland China have piled into salerooms in London, New York and Hong Kong.’”

China’s record-setting presence in the fine art market is not necessarily a bad thing, but if the recent past is anything close to prologue, the Chinese economy is heading for a hard landing.

Price of Sotheby's Stock Through Various Financial Cycles

“China’s meteoric rise in the global auction world might be a sign of well-earned wealth,” Thompson explains. “But periods of record bidding are scarily accurate bubble predictors, according to Vikram Mansharamani, author of Boombustology. They’re a ‘symptom of overconfidence and hubris’ as a newly rich society spends its easy money with exponential flamboyance.

“China’s appetite for fine art isn’t a stray indicator, Mansharamani says. It’s a telltale clue from a disaster movie we’ve seen play out at least three times before,” Thompson continues. “In the last 20 years, Sotheby’s stock has experienced four sharp peaks. In the late 1980s, Japan had been ‘the center of gravity’ in the international art market. But its economy imploded, sending Sotheby’s stock reeling. Ten years later, the Internet bubble drove another auction boom among Silicon Valley newbies, and the bubble burst again. Ten years later, we watched the same film play out. This year could be deja vu, all over again…all over again.

“Mansharamani makes an eerie supporting argument for a bubble in China: skyscrapers,” Thompson concludes. “In 1929, the world’s three tallest buildings were in New York. In 1997, before the Asian financial crisis, the Petronas Towers took the title from Sears Tower. Thirteen years later, the record-setting Burj Dubai was erected just as the latest financial crisis hit Dubai. It turns out that the world’s ten tallest new buildings are like a worldwide pulse of bubblicious economic activity. In 2015, he notes, Chinese skyscrapers will occupy spots #2, 3, 5, 9 and 10.”

Share Price of Sotheby's vs. Shanghai Composite Index

A final corroborating data point may be the Chinese stock market itself. Despite still-titanic credit growth in China – and despite unrelenting headlines of booming economic growth – the Shanghai Composite Index has failed to make any net progress during the last six months. As such, Chinese stocks are diverging noticeably from Sotheby’s – a stock the index has tracked very closely for most of the last two decades. While Sotheby’s stock is busy challenging its all-time high, the Shanghai Composite remains 50% below its all-time high of October 2007.

Maybe it’s still too early to panic about these various signs of cultural excess and stock market distress. But it’s not too early to worry.

Eric Fry
for The Daily Reckoning

What China’s Foray into Fine Art Means for the World Economy originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
What China’s Foray into Fine Art Means for the World Economy




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Go Long Material, Go Short Certified Idiots

April 25th, 2011

Some relationships:

The last time the US dollar exceeded 120 on the dollar index (DXY) was in January 2002. Today it’s trading at 74.04, a 38% decline. Since January, 2002, gold has risen from $282 to $1,509 an ounce. Silver has risen from $4.30 to $47.36 an ounce. A barrel of crude oil (WTI) has risen from $20 to $112. A rising oil price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches.

Some other relationships:

Federal Reserve Chairman, Ben Bernanke, knows that his stock-market support operations are coming to an end, or a pause – time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of US Treasury securities, is due to end in June. Classified as Permanent Open Market Operations (POMOs), the New York Fed dispatches about $6.5 to $8.5 billion into the banking system every day, as payment for 5- to 7-year Treasury notes. Chairman Bernanke wants the POMOs to continue, forever.

A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. (“Bankrupting” was not their description.) But Christina Romer, former chairperson of the “Council of Economic Advisors,” is “all in.” During a recent interview on Yahoo’s Daily Ticker, Romer gushed, “I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don’t understand why we’d be dialing back that tool.”

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the Daily Ticker, we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade (i.e. gold up, dollar down) will accelerate.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million. Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million. Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation – but given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20%.

However, despite the overwhelming evidence that QE I and II have been dismal failures, Romer continues to applaud them as successes, just like Chairman Bernanke. The striking similarity between Romer’s perspective and Bernanke’s seems odd…until you examine their resumes.

We have, first, Christiana Romer, Class of 1957, Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President’s Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President’s Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

Perhaps there’s a bit too much “in-breeding” in the gene pool of professional economists. Now some “highlights” from the Romer interview:

The Daily Ticker’s, Aaron Task: A lot of people say the Fed’s been very successful helping financial markets and helping people at the upper end of the income scale. There hasn’t been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it’s easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we’re exporting more, we need more workers to produce it.

TASK: Isn’t it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a “weaker dollar” means the dollar doesn’t go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It’s hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we’re not talking about what’s happening to your purchasing power here; we’re talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down… There’s no evidence that what’s holding back business spending or consumer economy is government activism.

[Editor’s note: In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: “Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game.”]

Many brand-name professors and economists from the Romer/Bernanke gene pool also continue to cheer the “successes” of quantitative easing. Average Americans, not so much…

“Comments” by Yahoo! viewers responding to the Romer interview, featured widespread contempt for QE, and therefore for Romer’s perspective.

Comment #1 was from “Ross,” who asked, “Is this chick retarded or what?” Of viewers who expressed an opinion about Ross’ analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from “Brian,” who queried: “Who knew it was so easy? Someone should go tell those poor nations in Africa that we’ve learned the secret: just produce more of your currency.” (Score: 182 to 11.)

Comment #3 was from “Kimmie Taylor” who observed: “QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits.” (253-18)

Comment #4 was from “Jack,” who stated one obvious problem and a fair conclusion: “The woman has never held a real job and knows nothing about the real world. She is a complete failure.”

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with “PhilippeB” (#6), a fast learner: “No idea who she is, but it is now official: Christina Romer is a certified idiot.” (62-3)

What to do about it? Please refer to the very top: “Some relationships.”

Regards,

Frederick J. Sheehan,
for The Daily Reckoning

Go Long Material, Go Short Certified Idiots originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Go Long Material, Go Short Certified Idiots




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Go Long Material, Go Short Certified Idiots

April 25th, 2011

Some relationships:

The last time the US dollar exceeded 120 on the dollar index (DXY) was in January 2002. Today it’s trading at 74.04, a 38% decline. Since January, 2002, gold has risen from $282 to $1,509 an ounce. Silver has risen from $4.30 to $47.36 an ounce. A barrel of crude oil (WTI) has risen from $20 to $112. A rising oil price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches.

Some other relationships:

Federal Reserve Chairman, Ben Bernanke, knows that his stock-market support operations are coming to an end, or a pause – time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of US Treasury securities, is due to end in June. Classified as Permanent Open Market Operations (POMOs), the New York Fed dispatches about $6.5 to $8.5 billion into the banking system every day, as payment for 5- to 7-year Treasury notes. Chairman Bernanke wants the POMOs to continue, forever.

A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. (“Bankrupting” was not their description.) But Christina Romer, former chairperson of the “Council of Economic Advisors,” is “all in.” During a recent interview on Yahoo’s Daily Ticker, Romer gushed, “I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don’t understand why we’d be dialing back that tool.”

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the Daily Ticker, we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade (i.e. gold up, dollar down) will accelerate.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million. Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million. Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation – but given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20%.

However, despite the overwhelming evidence that QE I and II have been dismal failures, Romer continues to applaud them as successes, just like Chairman Bernanke. The striking similarity between Romer’s perspective and Bernanke’s seems odd…until you examine their resumes.

We have, first, Christiana Romer, Class of 1957, Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President’s Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President’s Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

Perhaps there’s a bit too much “in-breeding” in the gene pool of professional economists. Now some “highlights” from the Romer interview:

The Daily Ticker’s, Aaron Task: A lot of people say the Fed’s been very successful helping financial markets and helping people at the upper end of the income scale. There hasn’t been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it’s easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we’re exporting more, we need more workers to produce it.

TASK: Isn’t it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a “weaker dollar” means the dollar doesn’t go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It’s hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we’re not talking about what’s happening to your purchasing power here; we’re talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down… There’s no evidence that what’s holding back business spending or consumer economy is government activism.

[Editor’s note: In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: “Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game.”]

Many brand-name professors and economists from the Romer/Bernanke gene pool also continue to cheer the “successes” of quantitative easing. Average Americans, not so much…

“Comments” by Yahoo! viewers responding to the Romer interview, featured widespread contempt for QE, and therefore for Romer’s perspective.

Comment #1 was from “Ross,” who asked, “Is this chick retarded or what?” Of viewers who expressed an opinion about Ross’ analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from “Brian,” who queried: “Who knew it was so easy? Someone should go tell those poor nations in Africa that we’ve learned the secret: just produce more of your currency.” (Score: 182 to 11.)

Comment #3 was from “Kimmie Taylor” who observed: “QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits.” (253-18)

Comment #4 was from “Jack,” who stated one obvious problem and a fair conclusion: “The woman has never held a real job and knows nothing about the real world. She is a complete failure.”

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with “PhilippeB” (#6), a fast learner: “No idea who she is, but it is now official: Christina Romer is a certified idiot.” (62-3)

What to do about it? Please refer to the very top: “Some relationships.”

Regards,

Frederick J. Sheehan,
for The Daily Reckoning

Go Long Material, Go Short Certified Idiots originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Go Long Material, Go Short Certified Idiots




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Weiss Ratings Identified Majestic Insurance Company as Weak Six Years Ahead of Failure

April 25th, 2011

JUPITER, Florida (April 25, 2011) — On Thursday, regulators took control of Majestic Insurance Company of San Francisco, a property and casualty insurer, following the signing of an order of conservatorship by the Superior Court of San Francisco.

Commodities, ETF, Mutual Fund, Uncategorized

Chart of the Week: VXV at Critical Juncture

April 25th, 2011

It seems almost like heresy to consider something other than silver or the VIX as a candidate for the Stock of the Week, but since there have been so many posts and charts about both subjects, I thought I might offer a slightly different twist.

Yes, it is time for me to trumpet the importance of VXV once again. For those who may have forgotten, VXV’s formal name is the CBOE S&P 500 3-Month Volatility Index. The CBOE describes the index in detail here, but the key takeaway is that VXV is essentially a 93-day version of the 30-day VIX. In other words, whereas VIX looks out at just one month of potential volatility and disruptions to the financial markets, VXV has a time horizon of one quarter. This means, among other things, that while both capture the essence of the Q1 earnings reporting season, VXV includes three FOMC meetings and three nonfarm payroll reports, among other things. And whereas there may be no significant developments regarding Greek debt restructuring, it is unlikely that this issue will not be addressed in the next three months.

For these and other reasons, I have always felt that VXV provided a better reflection of long-term and structural/systemic volatility than the VIX, which is better suited to measuring short-term event volatility.

Looking at a weekly chart of VXV since its October 2007 launch, one cannot help but notice a pattern of historical support in the 17.50 – 18.00 zone. Friday’s close took VXV down to 18.35. A couple of closes below could signal not just a change in structural volatility and longer-term risk, but also the arrival of a new volatility regime.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing
[graphic: StockCharts.com]



Read more here:
Chart of the Week: VXV at Critical Juncture

OPTIONS, Uncategorized

What’s Wrong With a Little Monetary Inflation?

April 25th, 2011

Colleague Porter Stansberry sent us this note:

The Justice Department is assembling a team to “root out any cases of fraud or manipulation” in oil markets that might be contributing to $4 a gallon-plus gasoline prices. Says OBAMA!: “We are going to make sure that no one is taking advantage of the American people for their own short-term gain.”

My bet is the “task force” won’t question Bernanke…

No, they won’t question Ben. That’s not their job. Their job is to find some poor schmuck and make him do the perp walk before the cameras. Maybe some guy who is speculating on oil futures. Or maybe a fellow who is running an oil company.

But let’s look at how this works.

The feds openly and explicitly try to cause inflation. No kidding. Ben Bernanke made it very clear. He was worried about falling prices…about deflation. He practically made his career as a deflation expert…claiming to be able to prevent it by dropping “money from helicopters,” if necessary.

He’s fought deflation in a number of ways. By buying bonds with made-up money. By lending money at zero interest rates. And by helping the US Treasury spend money it didn’t have and couldn’t raise by honest taxation or bond sales.

A little bit of monetary inflation is thought to be a good thing – especially when people don’t know what is going on. Add more money and it makes people feel wealthier. This leads them to spend more…sell more…produce more…and hire more.

But what happens when they see that it’s only a cheap trick? What happens when they see the helicopter overhead and realize that there is something very funny about money you give away for free?

Well, what would you do if you were a commodity producer? Say, you had oil in the ground or wheat in the field? Would you exchange it for dollars? Or would you wait…holding back a little bit…either because you thought the price was going up…or because you were afraid that the funny money might lose its value?

The trouble with a little inflation is that it has a way of becoming a lot of inflation – all of a sudden. In a sense, inflation is always a monetary phenomenon. But it’s also a psychological phenomenon…and an economic phenomenon too.

In a Great Correction, the authorities can add to the Fed’s balance sheet holdings. But, if the member banks don’t borrow and lend…you don’t get much of an increase in consumer prices. And if you do get an increase – such as we are seeing in the price of gasoline – it tends to work against a general increase in the price level. In fact, it tends to correct the inflationary cycle. That is, consumers pay more for gas and have less left over for other things. That’s why a sharp rise in oil prices doesn’t cause an inflationary boom. Instead, it always causes an economic slowdown. And recession tends to lower prices, not increase them.

Since prices remain stagnant or even go down, the authorities think they can get away with more of their inflationary policies. In fact, they believe they have no choice. They have to fight recession! Inflation is the last of their worries.

They “print” money. And they continue printing it. Because, as the recession continues, tax revenues fall. Then, the government comes to rely on the central bank to finance its deficits. Inflationary policies become not just “counter-cyclical” measures; they are an essential part of the feds’ budget.

And then, the psychological component comes into play. Investors begin to worry. They begin to buy gold – it will be their own financial reserves. They begin to expect higher prices – much higher prices. And producers begin holding back supplies. This produces scarcity…which causes prices to soar, convincing producers to hold back even more. And soon, ordinary households are buying gold too.

The feds look for scapegoats. They collar a speculator or two. They accuse producers of “hoarding.” They insist that there is no problem with central government finances or the central banks policies. The problem is “greedy” capitalists. Or the weather. Or whatever…

Remember, people starved in Germany in the winter of the Great Inflation of the early twenties – even though farmers had a record harvest. Why? Because farmers didn’t want to sell. They kept their produce in barns and silos…waiting until the money problems resolved themselves.

Naturally, the authorities tried to shift the blame. Some blamed speculators. Some blamed France and Britain. Some blamed bankers…especially if they were Jewish.

Bill Bonner
for The Daily Reckoning

What’s Wrong With a Little Monetary Inflation? originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
What’s Wrong With a Little Monetary Inflation?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

5 Stocks That Are Beating Analyst Estimates

April 25th, 2011

5 Stocks That Are Beating Analyst Estimates

The era of cost-cutting is over. This means it's going to get harder for companies to show radical profit gains. Indeed, the pace of upside surprises in the first quarter of 2011 has modestly lagged previous quarters, according to Zacks.com. Yet some companies continue to surprise analysts and investors with scorching profit growth.

Generating strong results to start the year can often set the stage for continued upside. Here's a look at mid and large-cap companies that have exceeded first-quarter profit forecasts by at least 25%, and a deeper look at some notable standouts.

Uncategorized

5 Stocks That Are Beating Analyst Estimates

April 25th, 2011

5 Stocks That Are Beating Analyst Estimates

The era of cost-cutting is over. This means it's going to get harder for companies to show radical profit gains. Indeed, the pace of upside surprises in the first quarter of 2011 has modestly lagged previous quarters, according to Zacks.com. Yet some companies continue to surprise analysts and investors with scorching profit growth.

Generating strong results to start the year can often set the stage for continued upside. Here's a look at mid and large-cap companies that have exceeded first-quarter profit forecasts by at least 25%, and a deeper look at some notable standouts.

Uncategorized

Spotlight on the VIX and Bollinger Bands

April 25th, 2011

As we sit in the pre-FOMC doldrums contemplating how Ben Bernanke will handle his historic post-meeting press conference and wondering whether we can properly label the next VIX move to 17 or 18 a ‘spike,’ this seems like a good time to review some of the elements of VIX spikes and other measures of VIX extremes.

Better yet, point your browser to the My Simple Quant blog and more specifically to a post from last Thursday, More on VIX and Bollinger Bands, in which the resident author Chris has presented the results of his analysis of what happens to the VIX and SPY in the week following those instance in which the VIX closes below its lower Bollinger band two days in a row.

A couple of comments are in order on the analysis at My Simple Quant. First, the results should not surprise long-time readers here, but for those who are prone to not click through, there is always something to be learned in the details. I have discussed at some length how one can use simple and exponential averages, moving average envelopes, Bollinger bands and other similar mechanisms to measure how far the VIX has strayed from various assessments of a historical range.

An important point to consider – and one not stressed by My Simple Quant – is that the VIX is generally a better market timing mechanism when it spikes up than when it prints extreme lows. Perhaps a better way of thinking of this phenomenon is that while an extremely high VIX can rarely cause investors to rethink where an appropriate range should be for volatility, an extremely low VIX can sometimes be a self-reinforcing mechanism and signal a move to a new lower volatility regime.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
Spotlight on the VIX and Bollinger Bands

OPTIONS, Uncategorized

China Makes Plans to Diversify Its Dollar Reserves

April 25th, 2011

The storms are building for the dollar, and the US economy, folks… There are a couple of things happening this week that could give us a clear indication as to which road we’re going to take… the Big Events Week! But first, while we were pounding down our Easter feasts, the Chinese were making plans to diversify their $3 trillion in reserves, and reduce their dollar holdings… Here’s the skinny…

OK… Remember last week when I told you that China’s Central Bank head, Zhou, had said that China had too much in reserves? (Read dollars, folks)… Well, this past weekend, a member of the monetary policy at the central bank, Bin, said, “$1 trillion dollars in reserve would be sufficient”… So, in case you’re searching for a calculator right now, (I know I did! HA) that would be a “skimming off the top” of $2 trillion dollars! It just so happens that $2 trillion is about the same amount that the Fed Reserve has printed with their QE1 and QE2!

Now, the question would be, just what are they going to do to get rid of $2 trillion dollars? Ahhh, grasshopper… We all know what they are going to do… They’re going to buy resources for their economy… They’ll spread a little to the problem children of the Eurozone, and they’ll invest in their infrastructure… The sleeping giant that my dad used to warn me about when I was a kid, has awakened, eh?

OK… So with that news spreading throughout the world last night, gold and silver, as they should, took off for new levels… Gold $1,517.20, and silver $49.10… It’s just crazy out there, folks! Investors are running for the cover of these metals, for they are the True Store of Wealth… Or, as I always call them, the “uncertainty hedges”… And brother are we walking in uncertain times right now!

Oh… And I guess it would be fair to say that this news from China has caused some widespread dollar selling… Even with most of Europe, Australia, and Hong Kong on holiday last night and today, the fear in the markets is that of “don’t get left holding dollars”…

Now… The Fed Reserve will meet this week, and here’s where I think the circuit breaker that I talked about last week will get turned on… So be careful this week, folks… The Fed could pull a rabbit out of its hat, ala-Bullwinkle, and come to save the day… (Yes, I’m laughing hysterically right now) Or… Top Fed Head Big Ben Bernanke, will simply repeat what he, and his fellow, quantitative easing-loving Fed Heads have had to say recently, which is that “it’s too early to pull the stimulus away”… And they are going to go the distance with QE2, which is the end of June…

A few weeks ago, I talked to you about what happens at the end of June when QE2 officially ends… I was concerned that with QE2 ending the markets would take that as a signal that the Fed believes all is OK in the US and a flight back into dollars could take place… For Treasury yields will certainly go higher with the Fed removed as the major buyer of them. When the Fed removes their stimulus – or “financial cocaine” as I call it – stocks are going to get hit with a hammer… and all the flow will be into Treasuries…

But, that only lasts as long as it takes for the economy to fall on its face, after going cold turkey, and then the Fed will be back with QE3, and QE4, etc. This shouldn’t be anything new to your eyes to read, for I’ve talked about this for some time now…

My friend, old colleague, and writer extraordinaire, David Galland, talked extensively about this in his letter last Friday, of which I have a snippet of here:

The politicians and their friends down at the Fed can pretend, as they do, that the overhang on the economy of some $14 trillion in debt, and another $50 trillion or so in longer-term entitlements, is much ado about nothing. This view of theirs is confirmed by the current budget discussions that talk of slashing $4 trillion out of federal spending over the next 12 years – but ignore that this slashing still anticipates annual deficits on the order of $1 trillion. There are facts and fictions in this universe of ours, and it’s a fact that the notion of spending our way to better days is a fiction.

And so, in my mind, there is no question that the Fed will ultimately be forced to unleash QE3 and, as Marc Faber [has] so eloquently stated…that will be followed by QE4, QE5 and so on through QE26 – or whatever number is in force at the time of the dollar’s collapse.

You can read David’s excellent piece titled “Forlorn Hope” by clicking here.

OK… So, it’s all gloom and doom this morning, I apologize for that… But, this is the kind of stuff you won’t get from your cable or local news, or Katie Couric on the national news! So, with all the gloom and doom, I’ll try to soften it up a bit, with some thoughts of other things…

Silver is up $1.91 this morning… That’s almost 2 bucks! WOW! I remember when you would be happy with a $2 move in a month! But gold and silver aren’t the only anti-dollar assets moving higher this morning… The euro (EUR) is knocking on the 1.46 door once again, and the Aussie dollar (AUD) hit, yet another post-float all-time record high overnight of $1.0777… (The Aussie dollar has backed off that a bit since hitting the new high). The Canadian dollar/loonie (CAD) is back above $1.05…

Speaking of the loonie… Last week, I said something about how the Canadian government didn’t care for the loonie above $1 because it hurt tourism… And a Canadian reader reminded me that it’s not just tourism, but manufacturing that suffers when the loonie is so strong… Correct-o-moon-do! But, right now, with energy prices soaring, and pushing inflation higher, the Canadian Central Bank (Bank of Canada) would be wise to allow the loonie to help with the heavy lifting with regards to fighting inflation.

The Economist had a good story this past week, regarding Singapore… Yes, even The Economist is jumping on our Singapore bandwagon these days… Shoot Rudy, I saw right here in The Daily Reckoning where they were talking about the Singapore dollar the other day! Here’s a snippet…

During the past several years, Singapore has emerged as one of the leading financial centers of the world, partially thanks to its ability to take advantage of upheaval, according to The Economist. While some financial hubs, such as Switzerland and London, have tried to balance attracting bankers and punishing them for some activities, Singapore has welcomed them with open arms. Thousands of financial-services companies have registered with the city-state’s monetary authority, and derivatives and other ancillary operations have thrived.

Remember what I told you a week or so ago about how China had chosen the Singapore Central Bank as a clearing bank for renminbi (CNY)… All of this noticing of Singapore is going to carry over to the Sing dollar…and that’s a good thing!

Another country that’s beginning to get a lot of recognition is Russia… And with the price of oil trading near a 30-month high at $112.64, it only makes sense that the ruble (RUB) has reached a 27-month high! Let me say that as long as you have protection like our BRIC MarketSafe CD did with 100% principal protection, owning rubles is OK… Otherwise, without protection, I wouldn’t touch them with your 10-foot pole!

Remember, last Monday? The big news was that S&P had downgraded the US rating to a negative outlook… One would have thought that this news would be the tipping point for Treasury values to plummet… but NOOOOOOOO! For some strange reason the markets are taking the S&P downgrade and thinking that this is a warning to the president, and that something will be done about it… OK… Will someone please come to help me off the floor; I fell there laughing so hysterically! But not just because the president won’t do anything… The lawmakers won’t either! Oh, I know, they’re trying, but in reality, folks, unless you’re talking about something more than $4 trillion over 10-years, that’s like removing a bucket of sand from the beach… Who’s going to notice?

And of all of you who live and trade based on the “Big Mac Index”… The Chinese renminbi (like we needed the Big Mac Index to tell us this), is among the most undervalued currencies along with The Hong Kong dollar (Honkers)… I’ll try to remember to look at this again in about 6 months, and then in a year, to see how much it has narrowed… Right now, a Big Mac costs the equivalent of $2.18 in China, and $3.71 here in the US.

Then there was this… A couple of weeks ago I told you how a very smart friend of mine said that silver had “gone parabolic” which is chartist talk… Well, if it had gone parabolic two weeks ago, I don’t know what the chartists are saying about it now, for it is $9 higher than it was two weeks ago! I have to tell you that last week, I received a note from a “source” that said the CFTC had given the Big Banks that had major short positions in silver, notice to begin to close them out… If that’s true, then it certainly explains the $9 two-week move, eh? Now, I don’t know that it’s true… But, it certainly makes sense for it to be true, and would explain why the chartists are still saying “sell at these levels” for they don’t know about the rumor…

To recap… China throws a cat among the pigeons with members of their monetary policy calling for a reduction of their dollar reserves, which would be about equal ($2 trillion) to what the Fed has printed during QE1 and QE2. This has sent investors running to gold and silver. Gold has set a new record level, and silver has a $49 handle this morning! The FOMC meeting this week will tell us a lot about the direction of the dollar… You know, I just thought of this… When it eventually comes down to the cheese that binds, the FOMC will have to decide whether they want to save the dollar, or the stock market…

Chuck Butler
for The Daily Reckoning

China Makes Plans to Diversify Its Dollar Reserves originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
China Makes Plans to Diversify Its Dollar Reserves




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Could These Stocks be the Next Apple, Cisco or Amgen?

April 25th, 2011

Could These Stocks be the Next Apple, Cisco or Amgen?

Companies rightly see research and development (R&D) spending as a key measure of whether a product line is fresh and capable of capturing impressive pricing and margins. When that figure is low, it's a sure sign a company is relying on older, possibly antiquated products to carry the day. And when this happens, the company often needs to cut prices to stay competitive.

Of course, a heavy reliance on newly-released products can only come through old-fashioned R&D spending. Companies such as Cisco Systems (Nasdaq: CSCO), Amgen (Nasdaq: AMGN) and even mighty Apple (Nasdaq: AAPL) have their massive R&D spending efforts to thank for their eventual success.

Heavy spending on R&D takes guts. It means that you're overspending in the near-term to build a better future. And high current expenses scare off many investors focused on short-term profits. If you've got a long-term view, you should always see how a company views R&D. Heavy spending now can deliver robust growth in the years to come.

With that in mind, I screened for companies that spend at least 35% of their revenue on R&D, focusing on companies that are expected to boost sales by at least 15% in 2012. If their R&D moves pay off, growth can stay elevated well beyond 2012. To narrow down the list, I also excluded companies with a market value below $350 million and insisted on 2010 sales of at least $50 million.

Here's what I found…

Biotech has no choice
If you operate in the pharmaceutical industry, R&D is a fact of life. More than half of the companies on the table above are making big R&D bets on new drugs. As an example, I recently profiled Human Genome Sciences (Nasdaq: HGSI), which is finally seeing a big payoff after earlier heavy R&D investments. Since my profile, Human Genome secured Food and Drug Administration (FDA) approval for a key drug that treats Lupus. The company can afford to keep stepping on the gas with other new products as well, with nearly $1 billion in the bank. Shares have risen only modestly on the FDA approval, but analysts have been increasingly warming up to the stock.

Timing is everything
A123 Systems (Nasdaq: AONE) highlights the risk of heavy R&D spending without the accompaniment of revenue. This maker of advanced batteries went public in 2009 and has already needed to raise more money on two more occasions. That really punished shares, though I as I note in this article, shares may finally be poised for a rebound.

Unlike A123 Systems, Codexis (Nasdaq: CDXS) has met or exceeded all of its anticipated milestones since coming public one year ago. Codexis provides enzymes that can catalyze biofuel production. [Andy Obermueller, editor of Game-Changing Stocks, first turned me on to the stock.]

The company's technology is also being applied to the manufacture of pharmaceuticals. Codexis still has more than $70 million in the bank. Also unlike A123, it has not needed to raise more money and may just make it to profitability without the need for any capital raising.

Codexis' revenue has been rising, moving past $100 million last year, but that's a bit deceiving. Most of that revenue has come from payments from key partners such as Shell (NYSE: RDS). To really impress investors, the company will need to show rising product sales, a process that has already begun: sales rose from $11 million in 2007 to $33 million in 2010.

Right now, Codexis is emerging as a pharmaceutical play. Drug makers are increasingly using the company's enzymes to help alter or expedite biological processes, in effect letting naturally occurring organisms more quickly digest feedstock into more productive molecules. The enzymes have been used especially in the production of anti-viral drugs.

But it's the biofuels market that holds the promise of generating major revenue by the middle of the decade. Shell worked with many young biofuel start-ups before deciding to work closely with Codexis. The two companies signed a collaborative research agreement in 2006, which has netted Codexis ongoing milestone payments. Yet it's another deal struck with Shell last August (in conjunction with Brazil's Cosan (NYSE: CZZ), a major producer of sugar-based ethanol) that has caught my eye. Shell and Cosan now jointly hold a 14% stake in Codexis and plan to use its technology to ramp up output of biofuels that can be made from other raw materials such as wheat grass or sugar cane fiber. Codexis shares rallied on the news but have since pulled back and are now below the April 2010 IPO price of $13.26.

Uncategorized

New Lows for Gold Silver Relationship and Monthly Views

April 25th, 2011

A lot of traders have been correctly focusing on the skyrocketing rise in Silver prices, but let’s look at the chart from a different angle.

The Gold to Silver relationship (a relative strength measure) just hit new lows this week and that’s a very big deal.

Let’s take a look at the last 30 years and go from there:

The chart below is a “Relative Strength” relationship chart that divides the price of gold (roughly $1,500) by the price of silver (just under $50 right now).

The chart tracks this difference over time.  The line over time shows which of the two precious metals was out-performing (or under-performing) the other.

Another way to see this chart is to ask “How many ounces of silver would buy one ounce of gold?” and right now, the answer is about 30 ounces of silver buys one ounce of gold.

In 2009, it took 80 ounces of silver to buy one ounce of gold and at the relationship peak in 1991, it took 97 ounces of silver to buy one ounce of gold.

Ok – that’s interesting, but what does it mean?

Generally, relative strength relationships ‘revert to normal’ or at least move towards equilibrium over time.

You can draw a horizontal line about the 70 area or perhaps 65 and call that the rough midpoint or ‘average’ price in the gold to silver relationship.

One might make an assumption that the relationship will soon try to come back into balance from this historical low of 30 (not seen since 1983).

If that assumption proves correct, then for the relative strength relationship to make a move up towards the mean or middle area, then we would expect a strengthening of gold relative to silver in the near future.

That can occur a few ways, some of which are the following:

1.  Silver prices fall dramatically while gold prices either stabilize or fall ‘less dramatically’ (the negative scenario)

2.  Gold prices begin to surge to ‘play catch up’ with the recent surge in silver while silver trades sideways or otherwise rises “less quickly” (the positive scenario)

In relative strength charting, the line rises or falls depending on the movement of one market relative to the other.

While both markets could rise together, the relative strength line (in this case) rises if gold increases “faster” or at a greater percentage than silver, and of course declines if silver rises faster than gold.

Of course, the opposite is true if price began to fall – should gold “hold its own” and stabilize or “fall less fast” than silver, the relative strength line above would rise.

Failure of these outcomes to happen – or for the relationships to change anytime soon – means the relationship line will continue extending in silver’s favor.

For reference, let’s look at the long-term monthly pure price charts of both gold and silver:

Silver Monthly:

From a simple math perspective, gold’s low in 2001 was roughly $300 and the current price of gold is $1,500 for a 500% increase.

For silver, price was under the $5 area in 2001, and the current price fell just shy of $50 per ounce for a 1,000% gain.

The bulk of the ‘instant’ gains – and main reason for the new low in the Gold to Silver relationship – was the meteoric rise in Silver with the breakout above $20 per ounce in September 2010 (just after Chairman Bernanke announced that new round of quantitative easing would begin in November).

From September 2010 to present, gold rallied from the $1,250 area to the current $1,500 area – a 20% rise.

In contrast over the same 8 month period, silver more than doubled from $20 per ounce to the present’s near-touch of $50 per ounce – a 150% increase.

And for fun, charting from the 2009 lows, gold traded at $700 per ounce and now has rallied 115% from the low.

Silver, on the other hand, rallied 500% up from $10 to the current $50 per ounce level.

Watch these markets together – and their relative strength relationship – for any signs of reversal or “mean reversion” in this long-term relationship.

The status quo remains if silver continues to outperform gold… but the mean reversion scenario suggests other outcomes such as a dramatic ‘catch-up’ rally in gold, or a ‘blow-off top’ correction down in silver.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
New Lows for Gold Silver Relationship and Monthly Views

Uncategorized

Trade This Canadian Stock for a Potential 35% Gain

April 25th, 2011

Trade This Canadian Stock for a Potential 35% Gain

If you follow the foreign exchange markets, you are probably aware of the Canadian dollar's rise against its U.S. counterpart. Canada's currency has now eclipsed the value of the U.S. dollar — it now takes roughly $1.05 U.S. dollar to buy one Canadian “loonie.”

The rising Canadian dollar is symptomatic of Canada's strength and fiscal stability. The country has remained economically robust, even during tough times for much of the rest of the world.

What is the best way for U.S. investors to participate in the economic strength of “the great white north?”

While you may be tempted to buy a solid Canadian bank or an oil and gas play, I've found a Canadian trade that not only offers an attractive dividend, but also shows strong technical and fundamental growth potential.

This company — which is a hallmark of the Canadian landscape — is the largest publicly-traded quick service restaurant chain in Canada and the fourth-largest fast-food chain in North America, based on market capitalization.

Specializing in fresh brewed coffee, donuts and baked goods, you can bet your loonie nearly every Canadian has been a patron of Tim Horton's (NYSE: THI).
To its core, Tim Horton's is a Canadian icon. The restaurant was co-founded by ice hockey star Tim Horton, who as a Toronto Maple Leaf ruled the classic Canadian sport from the 1950s through the 1970s.

Today in Canada, 80% of all purchased coffee is from Tim Horton's. And per capita, Canadians consume the most donuts in the world. Fittingly, Canada also has the most donut stores per capita on the planet — a majority of which are Tim Horton's.

At the beginning of 2011, there were more than 3,100 Tim Horton's locations in Canada. The company plans to open an additional 160-180 Canadian stores in the coming year.

The restaurant chain has edged its way into the States, battling against privately-held Dunkin Donuts as well as Starbucks (Nasdaq: SBUX). There are currently more than 600 Tim Horton's locations in the United States, with plans to add another 70-90 stores this year.

Tim Horton's is also expanding outside North America, with plans to open 120 restaurants in the United Arab Emirates and surrounding countries.

Such explosive growth should boost the company's future revenue and earnings potential.

Technically, THI appears strong.

The stock has been on Major uptrend for nearly two years and is currently trading at an all-time high around $48.

Tim Horton's shows no signs of slowing down. The stock briefly encountered minor resistance around $47.50 during March this year, but in April it broke through resistance, completing a bullish ascending triangle pattern. As such, the trend from here should be up.

The measuring principle for a triangle — taken by adding the height of the triangle to the breakout level — projects a price target of $64.77 ($48.01 – $31.25 = $16.76; $16.76 + $48.01 = $64.77).

Tim Horton's is also appealing from a fundamental standpoint.

The company reported fiscal fourth-quarter and full-year 2010 results in late February 2011. Although revenue for the quarter dropped 3.5% to $643.5 million (Canadian, CDN) from $667 million in the year-ago period, same-store-sales (revenue from stores open at least a year) increased 3.9% in Canada and 6.3% in the United States, showing important overall growth.

For the full 2010 year, revenue increased 4.1% to $2.5 billion (CDN), from $2.4 billion (CDN) in 2009, due in part to the sale of the company's 50% joint-venture interest in Maidstone Bakeries.

This year, the company expects same-store sales to rise a further 3-5%, resulting in 6.8% sales growth, or revenue of $2.7 billion (CDN). By 2012, analysts' project revenue will increase a further 6.7%, to $2.9 billion (CDN).

The earnings outlook is equally strong.

Due to the one-time sale of the company's 50% joint-venture in Maidstone Bakeries, fourth-quarter earnings surged 329.4% to $2.19 (CDN) per share, from $0.51 (CDN) in the year-ago period.

By this same token, full 2010 earnings soared 118.3% to $3.58 (CDN), from $1.64 (CDN) in 2009. Excluding the one-time bakery sale, earnings were $2.15 (CDN), representing a 31% increase from the previous year. This earnings gain was driven largely by higher profit margins, due to a shift in donut production from donuts made in-store to using pre-frozen batter.

For full-year 2011, Tim Horton's projects earnings will be in the range of $2.30-$2.40 (CDN) per share, representing at least a 7% increase as it expands its presence internationally.

By 2012, analysts' project earnings will rise a further 17% to $2.81. Even with rising coffee prices — which recently hit a 30-year high — Tim Horton's should maintain strong future profit margins, since it uses forward currency contracts to lock-in fixed coffee prices half a year to a year in advance. The company also passes on the higher costs to restaurant owners so customers don't have to pay more for their Cup of Joe.

In addition to growth potential, Tim Horton's is attractively valued, with a trailing price-to-earnings (P/E) ratio around 13.

Based on this P/E, the company has a solid PEG ratio (P/E divided by estimated growth rate) of about 0.74 (15/17.5). A PEG ratio under one usually shows solid value.
In the most recent quarter, the company announced plans to buy-back up to $445 million (CDN) of shares.

A bonus for traders, the company also announced plans to increase its quarterly dividend by an attractive 31%, to $0.17 per share (CDN). Traders interested in purchasing THI will likely see future dividend increases, as the company has consistently increased its quarterly dividend since 2006.

Given that THI is attractively valued, shows growth potential and appears technically solid, I plan to go long on the Canadian icon. I will enter a position at the opening of trading on Monday, April 25. I am setting a stop-loss of $34.57, just below historical support. Based on the measuring principle my target is $64.77.
The risk/reward ratio is approximately: 3.34:1.

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